BlueCrest Salaried member case digest – Published in the AIMA Journal – Edition 131

AIMA Journal – Edition 131

The first case relating to the UK’s salaried member rules (introduced into ITTOIA 2005 at 863A-863G by Finance Act 2014) was released on 29th June 2022, reference TC/2019/09328. It represents the opening test of the legislation in the UK courts and will have important implications for UK asset managers structured as a limited liability partnership (‘LLP’). Similar to the mixed membership rules that were introduced alongside the salaried member rules in 2014, the first case relates to an alternative investment manager, demonstrating HMRC’s continued focus on the industry. As such it makes for particularly interesting reading for market participants and practitioners alike, with direct implications on the UK’s competitiveness from a tax perspective.


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.

A “disguised salary” is defined as an amount which:

  • 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 obligations on compensation, including the requirement for the LLP to pay employer’s NIC at a rate of 13.8% (15.05% from April 2022).

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.


The appellant in the case is one of the Europe’s best known alternative asset managers. Since 2009 it has adopted an LLP structure through which to operate its UK investment management functions, and notably decided to close its funds to outside investors in 2015.

The case covers five tax years from 2014/15 to 2018/19, over which time approximately one third of the appellant’s workforce in the UK were partners in an LLP, split between 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. Compensation of individual partners comprised of three main components:

  • Priority distributions: Pre-determined monthly drawings in advance of profit allocations;
  • Discretionary allocations: Determined annually at the discretion of the LLP; and
  • Income point allocations: Residual profit allocated based on income points (which in practice were minimal).

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 therefore failing Condition B), but all the other individual partners (which made up the vast majority) met all three conditions and should be taxed as employees. The appellant 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).

Condition A

The case focused on the discretionary allocations made to PMs, which is unsurprising as one would expect these to form the largest component by industry standards. In 2014, in response to the rules being introduced, the LLP passed a number of resolutions the effect of which was that the discretionary allocations could not exceed the total profits of the LLP for the relevant period. This envisaged that if the proposed allocation did exceed the total profits of the LLP then discretionary allocations would be abated to reflect the shortfall.  It was clearly expected that this would be enough to prevent it from being ‘disguised salary’ as it would vary depending on the profits of the LLP.

Discretionary allocations were decided by a global remuneration committee, which was expected to work out the anticipated accounting profit and then reward members on the basis of their individual performance. For PMs this was determined by a percentage of the profit made on capital allocations. This was a process of judgment rather than the application of a formula and an individual’s profits could increase even though the overall profits of the LLP might reduce.

HMRC submitted that the discretionary allocations were not a share of overall profits and the imposition of a cap, by reference to the profits of the LLP, was not sufficient to establish that the allocations were variable by reference to the profits of the LLP, i.e. there had to be a clear link to the LLP’s profits and losses. There was a clear link to the individual performance of the member, but no clear link to the profits of the LLP. The LLP’s profits were just one of the factors which was considered, but there was no link between the amounts and the firm’s level of profit. HMRC said that the circumstances were analogous to an employer deciding the size of a bonus pool by reference to profit and then deciding the entitlement of the employees to it by reference to their performance. It was more akin to an employment relationship than a partnership.

The appellant submitted that the amounts were variable by reference to the overall profits of the partnership, and in particular the absence of profits or the presence of a loss, as if the profits were insufficient, then the discretionary allocations were abated or reduced to nil. Even though each partner was ‘siloed’ in that each partner was rewarded for their performance, poor performance from other partners could affect the overall profitability of the LLP and so could affect the amount awarded to each ‘siloed’ partner. Furthermore, the appellant submitted that there was no need for the discretionary allocations to track the profits of the LLP from year to year, it was sufficient that the amount was affected by the profitability of the LLP.

The learned Judge agreed with the appellant that there was no need for the discretionary allocations of an individual to track the level of profits of the partnership, hence an individual’s allocation could go up even if the firm’s profits decreased and vice versa. However, he did not agree that it was sufficient to establish the requisite link that if there were fewer profits available, the quantum of the allocations might abate. Rather, he decided that the element of variation derived not from the profits of the LLP, but rather from the performance of the individuals. He viewed the process as one under which the first step was to find the accounting profits (which would reflect losses and reductions in profits from year to year). This gave one the size of the ‘cake’. At the second step, the ‘cake’ was ‘sliced’ up amongst the members based on their performance. This was markedly different from the position in a traditional partnership in which members were entitled to a slice of the profit of the LLP. He considered the appellant’s arrangement to be more like a performance related bonus than a partner’s share in the overall profit of the partnership.

In deciding, the learned judge found against the appellant on Condition A on the basis that the discretionary allocations were disguised salary because whilst they were variable, they were variable ‘without reference to the overall amount of the profits or losses of the limited liability partnership’ so meeting the definition of a disguised salary under part (b). Further, or alternatively, they were not, in practice, affected by the overall amount of the profits and losses, so meeting part (c) of the definition.

In terms of a literal interpretation of the legislation, this is a surprising decision, as the discretionary allocations were clearly variable by reference to the overall amount of the profits or losses of the LLP. If those overall profits reduced, then the amount varied. The learned Judge seems to have adopted a highly purposive interpretation based on his view that the purpose of the salaried member rules was to treat as outside the rules, only those who were closely akin to the members of a traditional partnership. This purposive approach worked against the appellant on Condition A, but worked in their favour on Condition B.

Condition B

Having been treated as meeting Condition A, an individual partner could still escape being taxed as an employee under Condition B (noting it was common ground that Condition C applied). Specifically, where the ‘mutual rights and duties of the members of the limited liability partnership, and of the partnership and its members” give an individual partner significant influence over the affairs of the partnership, then Condition B would be breached.

HMRC submitted that the question of significant influence was to be resolved by looking to see who, having regard to the mutual rights and duties of the LLP and of the LLP and its members, wielded ‘managerial clout’. This was directed at what might be described as the constitutional aspects of the various relationships, and other aspects, such as the amount of capital allocations under a PM’s discretion was irrelevant.

The taxpayer submitted that to breach Condition B an individual member did not have to wield significant influence over all the affairs of the partnership, but rather it could relate to just one aspect of the partnership, such as investment activity or back-office activity. Particularly in the case of PMs, an individual partner with a capital allocation of $100m or above would wield such influence.

The learned Judge, who referred to his own experience of being a member of a law firm, accepted the appellant’s analysis. He saw no justification in limiting significant influence to managerial influence. He saw the broad purpose of this rule as being to distinguish between members playing the role of a partner in a traditional partnership and those who are playing the role of employees. In a memorable phrase, he said the role of a partner was to ‘find, mind and grind’, so get the work, supervise the work and undertake the work. The concept of ‘significant influence’ went well beyond managerial influence and into other aspects of a partner’s activities in a traditional partnership. He also accepted that influence in this sense could also be just over one aspect of the LLP’s business. His view was the evidence showed the PMs (with a capital allocation of $100m or more) took key investment decisions on a daily basis and could, both as a class and as individuals, potentially exercise influence over the LLP by reason of this investment activity.

However, (with the exception of the original four members of the ExCo) he did not come to the same conclusion for the infrastructure or other front office members, admitting that evidentially he was struggling to understand precisely what these individuals actually did in the context of the partnership. The lack of evidence and/or familiarity with the inner workings of an asset manager appear to have led to this decision, suggesting there is ample scope for the point to be revisited.

Again, given the wording of the legislation, which does seem directed at constitutional power rather than economic influence or involvement in the business of the partnership, the learned Judge appears to have adopted a strongly purposive interpretation based on his view that the purpose of the salaried member rules is to distinguish between persons whose role is akin to employees and those whose role is more akin to a partner in a traditional partnership. The counter argument to this rather broad approach is that parliament in providing the test at Conditions A-C has directed how the legislation is to apply with some considerable degree of precision and so those rules should be applied according to their terms, whether or not they result in practice in a separation between employee type arrangements and partner type arrangements.

Impact on asset managers

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 asset managers with similar issues who are in correspondence with HMRC.

Single-strategy asset managers (or those with a single profit pool to share) have historically been able to rely more heavily on Condition A being breached, and the decision in the case is unlikely to change this position. Additionally, it is likely to build confidence in those managers around also breaching Condition B for certain members, also perhaps hoping to apply some of the principles established in the case beyond PMs. Likewise, multi-strategy managers will welcome the finding on Condition B, but are likely to be disappointed with the decision on Condition A.

Nonetheless, there seems little doubt that the decision will be appealed and so further guidance can be expected from the courts as the case works its way through the appeals process. In short, whilst the outcome is positive on some aspects, it is perhaps just the latest chapter in an increasingly long and frustrating story.

Caution should be observed in reading too much into the conclusions thus far. Interpretation of the rules needs to be considered on a case-by-case basis and decisions are fact specific. A high degree of uncertainty around the application of the legislation still exists, however, what is clear is HMRC’s willingness to litigate and its continued focus on the industry. Best practice for taxpayers is to evidence compliance annually and reassess the rules for each partner at the beginning of the tax year, or more regularly if required (e.g. new launches, joiners, leavers, etc.). Contemporaneous documentation is extremely valuable and should be maintained. Now is clearly a good time for asset managers to both review their position and the evidence supporting it.

An extended version of the article co-authored with Francis Fitzpatrick KC and originally published in Edition 131 – AIMA Journal in September 2022.