BlueCrest Supreme Court decision reshapes LLP salaried member rules
Update: This article covers the Court of Appeal's January 2025 decision. The case has since progressed to the Supreme Court — read our latest analysis of the Supreme Court ruling for the current position on salaried member rules.
In a major LLP tax decision, the Supreme Court ruled that commercial importance and investment authority alone are not enough to demonstrate "significant influence" for salaried member rules.
The judgment in HMRC v BlueCrest Capital Management (UK) LLP now places renewed emphasis on LLP governance arrangements and partnership documentation.
This ruling follows the Court of Appeal's earlier decision in the same case, which had already signalled a narrower interpretation of Condition B.
What are the salaried member rules?
The salaried member rules were introduced to identify LLP members who are, in substance, operating more like employees than genuine partners. An LLP member will be taxed as an employee rather than a self-employed partner if all three of the statutory conditions are met. If a member ‘fails’ one or more of the conditions, they are taxed as a partner.
Condition A – whether the individual's remuneration is effectively "disguised salary".
Condition B – whether the individual lacks significant influence over the affairs of the LLP.
Condition C – whether the individual's capital contribution is less than 25% of their expected disguised salary.
The BlueCrest case focused primarily on remuneration and influence within the LLP (ie Conditions A and B).
The Supreme Court's decision
Condition A – disguised salary
The Court supported HMRC's position on Condition A, confirming that remuneration must have a genuine connection to the LLP's overall profits if members are to fall outside the disguised salary provisions.
The Court reiterated that a key characteristic of a traditional partnership is the sharing of the partnership’s profits and losses among its partners. In this case, the variable aspect of each individual’s remuneration derived primarily from net profits generated by the portfolios for which they were responsible and was not varied with reference to the overall profitability of the LLP, so their remuneration met Condition A.
Condition B – significant influence
The more widely anticipated aspect of the judgment concerned Condition B.
BlueCrest argued that many of its portfolio managers exercised significant influence over the LLP due to their investment discretion, level of responsibility and contribution to profitability. This argument was accepted in respect of some of the individuals by the First-tier Tribunal (FTT), which concluded that significant influence was exercised by virtue of having a significant impact on the LLP’s financial performance.
However, the Supreme Court decision agreed with the earlier Court of Appeal that the FTT had applied the wrong legal test, confirming that the necessary qualifying influence must come from the contractual or statutory governance framework of the LLP, and that relevant influence must be exercised over the affairs of the LLP as a whole, rather than over a particular business unit, team, desk or investment portfolio. As a result, this will now be remitted to the FTT to apply this legal interpretation to the facts in this case, with the expectation that the individuals will meet Condition B. This decision ultimately places the focus firmly on participation in the LLP's governance and strategic decision-making processes.
What does the BlueCrest decision mean for LLPs?
The decision clarifies that Condition B must be interpreted narrowly and is likely to prompt LLPs to review their Members' Agreements and governance arrangements to determine whether members have sufficient formal influence to remain outside the salaried member rules.
The judgment is likely to increase scrutiny of LLP governance structures and existing salaried member assessments by HMRC. If LLP members are treated as employees for tax purposes, this may increase tax burdens and PAYE obligations.
What LLPs should do following the BlueCrest ruling
LLPs should prioritise a comprehensive review and, if applicable, a refresh of their governance and member related documentation, given the sustained focus on the salaried members rules.
LLPs should review their internal governance frameworks - including member agreements, role descriptions, profit allocation methodologies and internal decision-making processes. Strengthening governance materials, maintaining timely management notes and clearly documenting the basis for significant influence, genuine profit linkage and the absence of disguised salary is essential to mitigate risk following the Court’s ruling.
This ruling arguably increases the significance of Condition C (the capital contribution condition) since, as noted above, failing to meet any of the three conditions is sufficient for an individual to be taxed as a partner. Although not a subject of this case, Condition C is often relied on to ensure the salaried member rules do not apply. The uncertainty around Condition B and the degree of control needed may mean LLPs need to place additional reliance on capital contributions.
The application of Condition C should be reviewed whenever there is a relevant change in circumstances, and annually, as it is linked to anticipated earnings. LLPs should also ensure that they adhere to HMRC’s approach to this legislation, as HMRC changed its guidance on Condition C last year, reversing guidance it had introduced the year before.
If you would like to discuss the impact of this ruling on your LLP, or would like a review of your annual report, please contact Mark Waddilove, Karen Hine or your usual RSM contact.