On 17 January 2025 the Court of Appeal (COA) judgement in the case of BlueCrest Capital Management (UK) LLP v HMRC was released, overturning the previous decision of the First Tier Tribunal (FTT) and Upper Tribunal (UT) in relation to Condition B. The COA ruled in favour of HMRC materially narrowing the interpretation of ‘Significant Influence’ under Condition B to legally enforceable rights and duties of members. Although the COA has sent the case back to the FTT to apply the law to the facts of the case, the expectation is BlueCrest will appeal to the Supreme Court, therefore the case may still have long way to go. This is a particularly disappointing outcome for Limited Liability Partnerships (LLPs) in the asset management industry who will review both the historic and future positions.

Legislation

The UK’s salaried member rules were introduced in 2014 and are contained in ITTOIA 2005 s.863A-863G. The rules operate by re-characterising a member of an 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”;
• Condition B – The individual does not have significant influence over the affairs of the partnership; and 
• Condition C – The individual does not have capital contribution equal to at least 25% of their disguised salary. 

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. 

Case summary

In 2009 BlueCrest adopted an LLP structure (the ‘LLP’) through which to operate its UK investment management functions and notably decided to close its funds to outside investors in 2015. The case covers the five tax years immediately following the implementation of the new rules from 2014/15 to 2018/19. 

During the period in question, approximately a third of the appellant’s workforce in the UK were partners in the LLP. The majority of the partners made minimal capital contributions, and their remuneration was largely linked to their individual performance. The LLP had an executive committee (the ‘ExCo’) which initially consisted of the COO, GC, CRO and CFO, but was later expanded on tax advice.

HMRC’s view was Condition A and C were met for all the partners, and that only the original four ExCo members should be classified as partners for tax purposes (as they had significant influence, therefore, failing Condition B). BlueCrest argued that Conditions A and B were not met for the partners. It was common ground that Condition C was met for all the members. 

FTT and UT Decision

The FTT released its judgement in June 2022 with the following findings: 

Condition A: The FTT concluded that where profit allocations are varied, then they should be varied by overall profits of the LLP. This was not found to be the case for the BlueCrest partners.  Personal performance alone was used to determine discretionary allocations which could fall within the definition of a disguised salary therefore Condition A was met for all partners.

Condition B: The FTT established two key principles:

1. The first principle is that significant influence should not be limited to managerial influence. 
2. 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. 

    
Based on these principles the FTT 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 FTT concluded that (apart from the four members on the original ExCo) 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. Importantly 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.

COA Decision

In January 2025 the COA concluded: 

Condition A: The COA agreed with the earlier tribunals in relation to Condition A with the conclusion remaining unchanged. 

Condition B: The COA upheld HMRC’s appeal in relation to Condition B, however, this was not on the basis HMRC had expected. Instead, it was determined that both earlier tribunals erred in law in accepting the wider construction of Condition B. It noted that 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 which was in line with their guidance. 

Viewed in a wider statutory context, the COA stated that it was clear “significant influence over the affairs of the partnership” must derived from the mutual rights and duties of the members of the LLP (both horizontally, as between the members themselves, and vertically, as between the members and the LLP) as conferred by the statutory and contractual framework which governs the operation of the LLP, and the relevant provisions of the LLP agreement. Therefore, the main focus should be on the terms of the LLP agreement itself. 
The Judge further discussed the concepts of ‘qualifying and non-qualifying influence’. Where the rights and duties of a member connote legal enforceability (whether found in a relevant statute or in the contractual agreement governing the LLP) this was referred to as ‘qualifying influence’. Conversely, ‘non-qualifying influence’ was referred to as where influence over the affairs of the LLP lacked any identifiable contractual and/or statutory source. Although such non-qualifying influence was to be excluded from consideration of significant influence, it may still remain highly material in deciding whether the ‘qualifying influence’ was ‘significant’.

There was also a further point discussed by the COA about the alleged unfairness to BlueCrest in relation to possible further evidence. Having relied on HMRC’s published guidance, BlueCrest in its previous responses had stated that there was no statutory requirement to look only at the LLPs governing documentation and that to do so would be to ignore the factual reality of how influence is exercised. HMRC in their response agreed with the approach and accepted that significant influence can arise in other ways than under the LLP Agreement. As the point was thought to be common ground, it was not elaborated. Despite this consideration the COA concluded that it would have been prudent for BlueCrest to prepare its evidence to deal with other possible sources of actual influence on the conduct of the LLP’s affairs, and that it could not plausibly be maintained that the LLP was misled by HMRC’s published guidance.

Impact on 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 / Supreme Court re-assess the case before a final view can be made. 

LLPs will again need to reconsider the application of the rules under their governance structures and partnership agreements, in particular where reliance was placed on the FTT / UT’s interpretation of Condition B. 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, unless it is genuine long-term restructuring. 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.

Action to be taken 

With majority of LLPs having a 31 March year end date, immediate action may be required, as such sensible steps would include action to: 

• Re-evaluate the application of the legislation following the COA decision, in particular given the tighter interpretation of Condition B; 
• Consider the implications for current, historic and future periods, with some appropriate stress testing including worst case scenarios (noting the increase in employers’ NIC from 13.8% to 15% in April 2025); 
• Quantify the probable financial impact on the business, future projections, cash flow and capital requirements; 
• Review existing compensation structures and promotion / recruitment options for partners; 
• Consider interaction with established co-investment structures and deferral structures (e.g. the AIFMD mechanism) for partners recharacterised as employees for tax purposes; 
• Assess possible accounting treatment, impact on financial statements (including disclosures) and regulatory reporting; 
• Review LLP agreements, profit allocation methodologies and side letters to determine with whom any potential liability ultimately rests; 
• Consider interaction with other areas of tax legislation, e.g. employment related securities, notification of uncertain tax positions; 
• Document the position in advance of the year end, noting that aspects of the legislation hinge on expectations at the beginning of the accounting period. Also include correlation analysis to assess how allocations have historically worked in practice; 
• Review at LLP board level (with meeting minutes) and keep detailed records of analysis, advice and decisions.