On 17 January 2025, the UK’s Court of Appeal (‘COA’) issued its decision in the case of HMRC v BlueCrest Capital Management (UK) LLP relating to the salaried member legislation in the context of Limited Liability Partnerships (‘LLPs’). The COA found in favour of HMRC, sending the case back to the First Tier Tax Tribunal (‘FTT’) for re-evaluation after outlining a tighter framework for Condition B, a conclusion perhaps not too surprising for those who followed the hearing in late November 2024. The decision represents a significant win for HMRC after BlueCrest had initially come out on top at the FTT and Upper Tribunal (‘UT’), although the saga is far from over. However this latest development will be extremely disappointing for the UK’s asset management industry, many of whom operate through LLP structures, as the ongoing uncertainty will continue to undermine the UK’s ability to compete in the global market place for the best talent.
Legislative Background
The salaried member rules came into force from April 2014 and operate by re-characterising a member of a LLP 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:
a) is fixed;
b) is variable, but is varied without reference to the overall amount of the profits or losses of the LLP; or
c) 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 allocations, including the requirement for the LLP to pay employers NIC at a rate of 13.8% (rising to 15% in April 2025). 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 Background
The BlueCrest case represents the first test of the UK’s salaried member legislation in the courts. The FTT’s original judgement was released back in June 2022 and focused on the assessment of partners under Conditions A and B.
For Condition A, the FTT found that there is no need for individual profit allocations to track directly overall performance. The key point was 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 BlueCrest 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), therefore Condition A was met.
For 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 portfolio manager (‘PM’) partner with a capital allocation of $100m should be regarded as having significant influence, therefore breaching Condition B. However, in the case of the non-PMs the court concluded that (apart from the four members on the executive committee) there was insufficient evidence to form a view of whether they demonstrated significant financial or operational influence, as such it concluded Condition B would be met. In arriving at these decisions 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.
Both, HMRC and BlueCrest appealed the decisions, but the FTT’s conclusions were upheld by the UT in September 2023, following which HMRC appealed to the COA with the case being heard in November 2024.
Court of Appeal Decision
The COA agreed with the earlier tribunals in relation to Condition A with the conclusion remaining unchanged. However, the judge upheld HMRC’s appeal in relation to Condition B, albeit not on the basis HMRC had expected, instead based on an alternative argument formulated during the hearing. The COA determined that both earlier tribunals erred in law in accepting the wider construction of Condition B. In particular, the FTT approached its examination and evaluation of the evidence on the mistaken basis that the necessary qualifying influence on the affairs of the LLP could be found not only in the LLP agreement and any other sources of enforceable mutual rights and duties, but also in any de facto arrangements which were in place. The UT did not pick this up at the initial appeal, and it is notable that HMRC had previously agreed with the approach. Nonetheless, the case has now been sent back to the FTT for re-evaluation with the tighter framework for Condition B.
Implications for LLPs
LLPs have traditionally been advised that it would be prudent to structure their affairs such that at least two or more of the conditions are breached, a valuable approach given the latest developments. The COA decision creates a more stringent framework for assessing Condition B, however we will have to wait until the FTT re-assesses the case before a final view can be made, and even then it could be open for further appeals. LLPs will again need to reconsider the application of the rules under their governance structures and partnership agreements. Failure to do so could result in the incorrect application of the salaried member rules and the associated PAYE and NIC implications. The Court’s emphasis on formal documentation may also lead to a broader review of LLP practices across the financial and professional services sectors, where informal arrangements may be prevalent. Caution should be given to simply amending LLP agreements in light of the anti-avoidance rules. Firms should begin reviewing their LLP agreements to assess whether the rights, powers, and responsibilities of members are appropriately codified to meet the newly clarified interpretation of Condition B.
The COA’s judgement can be found at:
https://caselaw.nationalarchives.gov.uk/ewca/civ/2025/23?court=ewca%2Fciv
The details of the appeal at the UT are available at:
A summary of the original case can be found here:
In addition please see our article in AIMA on the same subject:
And finally, in terms of how to evidence your position:
https://larkstoke-advisors.com/2023/02/20/salaried-members-legislation-documenting-your-position/