Judgement date: 29/06/2022

The first case relating to the UK’s salaried member rules was released on 29th June 2022. The BlueCrest case represents the first test of the legislation in the courts and will have important implications for any business structured as a limited liability partnership (‘LLP’). Similar to the mixed membership rules that were released alongside the salaried member rules in 2014, the first case relates to an alternative investment manager. As such it will make for particularly interesting reading for businesses and practitioners in the industry alike.

Legislative Background

The salaried member rules came into force from 6 April 2014 and operate by recharacterising a member of a limited liability partnership as an employee for UK tax purposes, where all of the following three conditions (A to C) are met:

  • Condition A – The individual is reasonably expected to receive remuneration that is at least 80% “disguised salary” for services performed;
  • Condition B – The individual does not have significant influence over the affairs of the partnership as a whole; and
  • Condition C – The individual does not have capital equal to at least 25% of their disguised salary contributed as capital to the partnership.

An amount is a “disguised salary” if it:

  • is fixed;
  • is variable, but is varied without reference to the overall amount of the profits or losses of the LLP; or
  • is not, in practice, affected by the overall amount of those profits or losses.

To be treated as a genuine self-employed partner for tax purposes an individual must breach one or more of these conditions. If all three conditions are met then the partner will be classed as an employee imposing PAYE/NIC obligations on profit allocation, including the requirement for the LLP to pay employers NIC at a rate of 13.8% (15.05% from April 2023). Failure to do so may also lead to interest and penalties.

The rules are intended to apply to those members of LLPs who are more like employees than partners in a traditional partnership and are designed to ensure that LLP members who are, in effect, providing services on terms similar to employment are treated as employees for tax purposes.

Case summary

Established in 2000, BlueCrest is one of the industry’s best known alternative asset managers, and since 2009 it has adopted an LLP structure through which to operate its UK investment management functions. In 2015 BlueCrest decided to close its funds to outside investors having spun out its algorithmic trading business, Systematica, in the previous year. The LLP had two forms of income as a result of its adopted transfer pricing policy, being income relating to support services provided to the wider group and separately income relating to the provision of investment management services.

The case in question covers five tax years from 2014/15 to 2018/19, over which time the LLP had between 63-86 partners and between 195-280 employees in its service company (being a corporate member of the LLP). This equates of approximately 1/3 of the individuals in the business being partners.

The individual partners were split into three broad categories:

  • 1/5th infrastructure members;
  • 3/5th portfolio managers / discretionary traders (collectively the ‘PMs’); and
  • 1/5th other front office members.

The infrastructure partners included the executive committee (‘ExCo’, which initially consisted of the COO, GC, CRO and CFO, but was later expanded), heads of departments and other senior members of these departments. These included individuals with titles such as: head of compliance, head of operations, head of technology and head of product control.

The BlueCrest PMs consisted of individuals with investment management discretion over a portfolio, who were typically given a capital allocation of $100m or more (representing the level of risk that a PM is allowed to take), across a total portfolio of around $15Bn. They also included desk heads who oversee a team of PMs and may have a capital allocation of their own.

Other front office members included very experienced researchers or technologists responsible for managing teams such as quant research teams and computer modellers, but who do not have their own discretionary portfolios. These included individuals with titles such as: head of quant research, head of sales, senior quant research manager, analyst and trading assistant.

The compensation of individual partners comprised of three main components:

  1. Priority distributions: Pre-determined amounts paid by way of monthly drawings against the expectation of profit. For PMs this was generally £150,000.
  2. Discretionary allocations: Determined annually at the discretion of the LLP. For PMs the calculation was formulaic, based on a percentage of the performance of their portfolio less certain costs. For non-PMs a variable compensation pool was established, and awards made by reference to departmental performance, personal performance and industry benchmarks.
  3. Income point allocations: Remaining profits after discretionary allocations are allocated based on income points, but these amounts was generally minimal.

Based on the determinations raised by HMRC, they asserted that PAYE should have been operated on around £330m of profits, suggesting that they were seeking additional employer’s national insurance contributions of around £45m (assuming tax paid to date by the partners would offset the PAYE liabilities).

HMRC’s view was that only the original four partners on the ExCo should be classified as partners for tax purposes, based on the fact that they had significant influence and therefore failed Condition B. With regards Condition A, it was agreed that the priority distributions are disguised salary and the income points allocations are not disguised salary, however the parties disagreed on the interpretation of discretionary allocations. BlueCrest appealed, asking that the First Tier Tax Tribunal (‘FTT’) consider both Conditions A and B for the remaining partners (noting that it was common ground that the application of Condition C was not in question).

It should be noted that FTT decisions are only binding on the parties in a particular case. They do not need to be followed by the FTT in other cases, or HMRC or taxpayers in respect of other matters, even where they are materially similar. Nonetheless a published decision will clearly be of assistance to taxpayers with similar issues who are in correspondence with HMRC. This is not to say that a FTT decision on a similar issue will not be followed, merely that the FTT can (if they wish) come to a different decision in another similar case.

It should also be noted that BlueCrest has also issued judicial review proceedings regarding the legality of HMRC’s application of the salaried member rules in the High Court, which we understand relates predominantly to HMRC’s approach to the case given their published guidance.


In forming his view the judge, Nigel Popplewell (who himself was previously a tax partner within a law firm and former first-class cricketer for Somerset) focused heavily on the concept of a ‘traditional partnership’ outlining that the legislation had to be construed in the context of its purpose.

Condition A

The court was not convinced that conceptually a reduction of individual profit allocations as a result of a lack of LLP profits (caused by unforeseen or catastrophic events) should be translated as being variable by reference to profits as a whole. This could in effect happen in any partnership, therefore the correct approach, as the legislation requires, is to form a view based on what is expected at the beginning of the year.

However, there is no need for individual profit allocations to track directly overall performance. The key point appears to be that where profit allocations are varied, then they should be varied by overall profits, not simply (in theory) reduced by the lack of profits. It was found that in practice the partners profits were not affected by the overall profits and losses of the partnership. The overwhelming factor that was used to determine discretionary allocations was personal performance alone. As such the discretionary allocations could fall within the definition of a disguised salary under limb (b) or (c).

Condition B

The court established two key principles, which appear largely based on the judge’s own experience of working within a traditional partnership. The first principle is that significant influence should not be limited to managerial influence. The second principle is that the expression “affairs of the partnership” should not be restricted to the affairs of the partnership generally but can be over an aspect of the affairs of the partnership.

The court focused on financial influence, noting that the role of a partner in a traditional partnership is to “find, mind and grind”, i.e. they are expected to go out and find work, supervise others to undertake it, and to do the work themselves. Individuals made up to be a partner in a traditional partnership must demonstrate each of these qualities and these are not limited to making management decisions. Furthermore, operational influence should also fall squarely within the ambit of Condition B.

It found that a PM with a capital allocation of $100m (equating to only 0.667% of the portfolio) should be regarded as having significant influence (although it is important to note BlueCrest does not have external investors so arguably have greater scope to allocate capital to partners compared to other managers). However, in the case of the non-PMs the court concluded that there was insufficient evidence to form a view of whether they demonstrated significant financial or operational influence.

It was also noted that significant influence does not need to be exercised through a formal constitutional procedure, but requires a realistic examination of the facts. Whilst HMRC had agreed that the original four members of the ExCo had significant influence the court, whilst not disputing this position, noted that in a traditional partnership these roles could potentially be undertaken by employees.


The conclusion was:

  • Condition A: All of the partners met Condition A.
  • Condition B: PMs with capital allocations of $100 million or more do not meet Condition B; but other PMs or non-PMs (other than the original ExCo) meet Condition B.

Impact on asset managers

After over eight years of uncertainty, the FTT’s decision at last provides some helpful practical insight as to how some aspects of the legislation should be interpreted. However, whilst the discussions around Condition B are helpful, the case did little to further the interpretation of Condition A beyond the obvious. It is also disappointing that once again a member of the alternative asset management industry is the first to be litigated.

The parties have 56 days to appeal the decision. On the assumption that the majority of the tax at stake relates to the PMs, and in the context of the wider industry, HMRC may well appeal. They also need to consider to what extent the outcome could be applied in other industries.

For asset managers that are structured as LLPs there are a number of take-aways:

  • The rules should be construed in the context of a ‘traditional partnership’;
  • The number of partners in a LLP, or indeed the ratio to employees appear irrelevant;
  • It is important to be able to retain factual evidence to demonstrate the position taken with respect to the legislation;
  • For Condition A:
    • There needs to be a clear link between how profit allocations vary with reference to overall profits;
    • There is no need that allocations simply ‘track’ overall profits, albeit it is useful that allocations based simply on units have not been disputed;
    • The potential for allocations to be restricted by lack of profits is not sufficient;
    • A view needs to be formed at the beginning of the year as to the application of the legislation based on reasonable expectations;
  • For Condition B:
    • Significant influence extends to financial and operational influence;
    • The expression “affairs of the partnership” extends to an aspect of the affairs of the partnership.
    • PMs (and those that have discretion over capital allocations) do have significant influence in the view of the FTT, however it is important to note managers with external investors may not be able to allocate discretion over assets so freely;
    • Influence attaches to fee generators, as such the construction of income flows in the context of transfer pricing policies should be considered;
    • Executive committee members do not necessarily have significant influence, despite HMRC appearing to accept that they do in principle.
  • Caution should be exercised when amending LLP structures in light of the targeted anti-avoidance provisions.

It is also worth noting that the case did not directly address the influence of roles such as investor relations / capital raising, which is logical given that the business is closed to external investors. In a traditional asset manager such roles are vital as the relationship with external investors is critical. Nonetheless, references to partners needing to be able to go out and find the work in the case are helpful. The fact that there is also a clear financial impact resulting from raising capital (noting that management fees start accruing from inception on investment) supports that they have financial influence.

Managers are likely to be disappointed that more certainty could not be given around the infrastructure partners. Whilst financial influence appears to attach to fee generation, the risk mitigators in the business that prevent significant costs (e.g. regulatory, legal, IT, finance and tax roles) are not examined in detail.

Also, whilst there appears to have been some systematic trading activity being undertaken, this does not seem to be addressed separately in the case. Quantitative or algorithmic investment strategies based on a collective team effort may conceptually not so easily align with the traditional partnership model, and compensation is more likely to be linked to a collective performance.

Action to be taken

LLPs should review their position in light of the case, but be mindful that appeals may well be made. It seems unlikely that this will be the last case in relation to the rules, but now is a good time to reflect on the interpretation of the legislation by the court. Ensuring that appropriate documentation is maintained to evidence compliance with the legislation is of paramount importance, as is the need to reassess the rules annually (or even more frequently if required). Any decision to restructure aspects of the partnership should always be considered in the context of the targeted anti-avoidance rules.


Please see here our previous article explaining the salaried member rules.