On 17 January 2025, the United Kingdom Court of Appeal in HMRC v BlueCrest Capital Management (UK) LLP [2025] EWCA Civ 23 (“BlueCrest”) held that the First-tier Tribunal (“FTT”) and the Upper Tribunal (“UT”) had made a mistake of law with regard to their respective interpretations of Condition B of the UK Salaried Members Rules (the “Rules”).  

The Rules determine when members of limited liability partnerships (“LLPs”) should be treated as employees ("salaried members") rather than members of the LLP for tax purposes. In order for the Rules to apply, three statutory conditions (Conditions A, B and C) must each be met. The central issue of the appeal was the interpretation of Condition B of the Rules, and specifically what constitutes "significant influence" over the affairs of an LLP. The Court of Appeal held that in order for a member’s influence to be recognised as "significant influence" it must stem from the legally enforceable rights and duties outlined in the LLP’s governing documents, primarily the LLP Agreement. A member’s influence arising from informal arrangements or de facto practices, not enshrined in the LLP’s formal agreements, does not satisfy Condition B.

Background

A background to the case facts, further information on the Rules and the decisions held by the FTT in June 2022 and the UT in September 2023, are covered in the following Brass Tax articles, BlueCrest Salaried Members Case: Who Is a Significant Influencer? and Perfect Influence?.

By way of reminder, under the Rules, there are three conditions that must each be met in order for a member of an LLP to be classified as an employee. These are:

1. Condition A: It is reasonable to expect that at least 80 per cent. of the member’s total remuneration is ‘disguised salary’, being where the remuneration is fixed or not linked to the overall profits or losses of the LLP.
2. Condition B: The mutual rights and duties of the members of the LLP do not give the individual member significant influence over the affairs of the LLP.
3. Condition C: The member’s capital contribution to the LLP is less than 25% of their expected ‘disguised salary’.

The statutory provisions of Condition B are set out in section 863C of the Income Tax (Trading and Other Income) Act 2005 which states: “the mutual rights and duties of the members of the limited liability partnership, and of the partnership and its members, do not give [a member] significant influence over the affairs of the partnership”. The FTT and UT took a broad approach to the interpretation of "significant influence" in line with the guidance outlined in the HMRC’s Partnership Manual.[1]  Condition B does not contain definitions of the key words "significant", "influence" or "affairs", although the Court of Appeal noted that it was “inherent in the statutory wording that the relevant influence must be given to [the member] by the mutual rights and duties of the members of the LLP, either as between themselves or as between them and the LLP.”[2]

Both Tribunals agreed with the submission of the appellant, BlueCrest Capital Management (UK) LLP, that (a) the influence referred to in Condition B is not limited to managerial influence, and (b) such influence could be over one or more aspects of the LLP’s affairs, and it need not be over the affairs of the partnership as a whole.[3]  The UT held it was permissible to consider the question of "significant influence" in terms of actual (de facto) influence, which may not necessarily derive from the LLP Agreement or any formal agreement.  

The Court of Appeal found that both Tribunals had “erred in law”[4] in accepting the wider construction of Condition B.  The importance, according to the Court of Appeal, was to focus on determining the true construction of the statutory language.  In this regard, the Court of Appeal found that the statutory interpretation of the legislation involved an “objective assessment” of the meaning conveyed by the statutory wording of the Rules.[5]  Building from that point, the Court of Appeal concluded that the wording of Condition B “is clear and unambiguous.”[6]  It was held that ‘significant influence’ should be determined by the “legally binding constitutional framework of the partnership”,[7] and de facto influence should not qualify, although its nature and extent may be relevant in determining whether the qualifying influence was significant. In practice, this would mean the influence must derive from an LLP Agreement. Furthermore, the scope of the member’s influence on the LLP should be “viewed as a whole and in the wider context of the Group”.[8]

In light of these points, the Court of Appeal set aside the decision of the UT and remitted the case to the FTT so that the evidence could be reconsidered in light of the correct test, focusing on a close examination of the terms of the LLP agreement as the main source of significant influence.

Condition A

While the crux of the judgment focused on Condition B, Condition A in the Rules was also addressed. It was argued by the appellant before the Court of Appeal that the portfolio managers were entitled to a discretionary bonus and on this basis they had a real link to the profits of the LLP, and as a result those managers could not be classified as employees as they would not meet Condition A.  The Court of Appeal disagreed with the appellant’s submission on this point and upheld the decision of both Tribunals.  It was held that the overall amount of profits merely function as a cap on termination, which was variable without reference to overall profits. As a result, Condition A had been satisfied in relation to all relevant individual members of the LLP, including the portfolio managers and the desk heads.

Implications for LLPs

The Court of Appeal’s judgment provides crucial clarification on the interpretation of ‘significant influence’ under Condition B of the Rules.  The narrow interpretation of Condition B taken by the Court of Appeal emphasises the importance of formalising governance structures within the LLP’s legal documentation to reflect the intended distribution of influence and control among members. Furthermore, the Court of Appeal stated that the requisite influence must be exerted over the LLP’s affairs “viewed as a whole”,[9] rather than over specific aspects or business units.  Some challenges remain in the context of this otherwise attractive formulation of the Condition B test; the position remains uncertain, for example, for a member who may hold significant influence through their decision making authority in a limited number of key strategic areas, but have no influence in others.

The Court of Appeal’s decision has substantial implications for LLPs, particularly in how they structure their governance and draft their LLP Agreements. As a result of the judgment, LLPs should review their agreements to ensure that the rights and duties of members are clearly defined. In the aftermath of BlueCrest, reliance on informal practices or unwritten understandings may not suffice to establish ‘significant influence’ under Condition B. Furthermore, members who previously considered themselves outside the scope of the Rules owing to their de facto influence may need to reassess their positions in light of the judgment.

[1]               HMRC Partnership Manual at PM256200.

[2]               Paragraph 17, BlueCrest.

[3]               Paragraph 74, BlueCrest, citing the decision of the FTT at paragraphs 172 through 184 of that Tribunal judgment.

[4]               Paragraph 112, BlueCrest.

[5]               Paragraph 62, BlueCrest.

[6]               Paragraph 94, BlueCrest.

[7]               Paragraph 94, BlueCrest.

[8]               Paragraph 70, BlueCrest.

[9]               Paragraph 70, BlueCrest.