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Morning Coffee: Court confirms hedge fund managers can pay less income tax. UBS makes its bankers wait and see

Who owns BlueCrest?  Most people would give the obvious answer – it’s Mike Platt, the best paid man in finance.  He’s the CEO according to his LinkedIn, and since the fund gave outside investors their money back, it’s generally spoken about as if it were his family office.

But technically speaking, BlueCrest Capital Management LLP is a partnership.  The other front office staff don’t have as much of an ownership stake as Mike Platt does, by quite a long way, but they do have money in the fund, and from a legal point of view, they’re all partners.

This isn’t just a trivia question of the sort you might hear during quiz night at the Punch Bowl in Mayfair.  It has important tax implications in the UK.  Partners are not employees, and so their remuneration is not subject to certain employment taxes (most importantly, National Insurance, the equivalent of Social Security payroll tax). Historically, partners were treated as self-employed, which meant they could offset their costs against their earnings and reduce their income tax liability in the process.

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Sounds almost too good to be true.  And it is, indeed, almost too good to be true.  In order to avoid losing so much revenue, the UK tax authorities created the concept of a “salaried member” of a partnership, that being someone who was legally a partner, but economically an employee and who would be taxed as the second.  For the last couple of years, BlueCrest has been in litigation over whether this applies to its portfolio managers and traders.  Yesterday, that reached the High Court, with a decision that could cost BlueCrest quite a lot of back tax, but which looks like something of a draw overall.

Basically, if your ownership stake is small compared to the founder’s, there are two ways that you can show you are not a “salaried member”:

Firstly, if your remuneration is more than 80% determined in a way that varies with the profits of the partnership.  This might look promising, but the court found that BlueCrest’s people have bonuses and revenue shares which depend on their own portfolios, not the overall firm.

Or secondly, if you have “significant influence over the affairs” of the partnership.  On this point, BlueCrest successfully argued that if someone’s managing a $100m portfolio, that’s significant influence.

Consequently, there’s a new status gap in the front office at BlueCrest.  Everyone is going to be a high earner by most standards, and everyone will be paying income tax – there’s no way around that.  But some people will still effectively be self-employed as partners and presumably able to mitigate their tax exposure, while others  who might normally consider themselves to be quite senior – execution traders, risk managers and the recently hired global talent partner Lewis Wrall – are going to be deemed as employees. People like Samuel Horwood who are hired to be portfolio managers can think of themselves as the “real” partners. 

Elsewhere, the initial shock of Credit Suisse integration has now subsided at UBS, but it seems that employees will have to wait until February for details of Sergio Ermotti’s full three year plan.  That will be business as usual for the CS survivors, who have spent most of the last five years waiting for a new strategic plan to be announced after the collapse of the last one, but the UBS people might find it a little stressful.

Going by the early comments, it might not all be bad news for the investment bank – Ermotti says that the merger has created “critical mass” in the USA, and that he now wants to look at integration and how it could create “even more opportunities to help clients to monetize or go through an M&A transaction for their own businesses”.

But there is also likely to be cost-cutting.  Half of the savings are apparently going to come from relatively painless sources like the winding down of legacy infrastructure and IT systems, but as any experienced analyst will tell you, that means that the other half won’t.

In the meantime, one of the safest places to be might be the bad bank.  Ermotti’s team have now looked over the Credit Suisse legacy portfolio and decided that although there’s a lot of stuff there which ties up regulatory capital and needs to be run down for the benefit of shareholders, it’s not “toxic”, and he wants it to be sold off slowly and profitably.  That means that it will need traders and risk managers well into the next three-year plan.

Meanwhile …

The lifeboats might have departed, but other banks are still combing the water around the wreck of Credit Suisse and picking up survivors – eight global equities staff have been hired by HSBC to boost its franchise. (Bloomberg)

Next year’s intern class might be able to party a little harder and sleep a little easier after doing so – a new state law in New York prevents employers from looking at the social media of applicants or employees for any hiring-related or disciplinary reasons. (NY Post)

“Entrepreneurship through acquisition” is the new, slightly self-contradictory sounding trend for new MBAs.  The idea is that if you’re going to be working crazy hours, rather than doing so for the benefit of an investment bank or consultancy, why not just acquire a small business yourself and apply your newly-learned skills to making yourself rich? (Bloomberg)

A couple of months ago, we wrote about the success story of Deutsche Bank finally integrating the system of Postbank.  That might have been a tiny bit premature; the regulator has described continuing problems experienced by customers as “unacceptable”. (Reuters)

The toughest job in paradise – Moelis utility sector banker Scott DeGhetto is going to become CFO of Hawaiian Electric.  Since the firm is being investigated for potentially being responsible for the wildfires that devastated Maui, other executives have feared to tread there. (Bloomberg)

Christian Odey apparently blamed some of his worst behaviour on the effects of dental anaesthetic? (FT)

Titles are piling up at Bank of America’s North American investment banking team. Loli Wu will be head of transportation and infrastructure, and co-head of industrials investment banking.  Bill Young will remain co-head of diversified and advanced industrials, but will also be co-head of the overall industrials group, jointly with Wu.  All clear?  (Bloomberg)

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AUTHORSarah Butcher Global Editor

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