The recent Court of Appeal ruling in HMRC v BlueCrest Capital Management (UK) LLP has provided important clarity on the interpretation of Condition B in the LLP salaried member rules. The decision has significant implications for LLPs that rely on this condition to determine employment tax treatment.
Background – Deemed employment – LLP members
When LLPs were first introduced, many firms restructured their employment arrangements to take advantage of the tax benefits of self-employment. Members of LLPs, like members of unincorporated partnerships were considered (supported by the legislation) self-employed, meaning their income was not subject to PAYE, employer’s and employee’s National Insurance or monthly tax deductions. Many firms operating as partnerships invited their employees to become LLP members of the firm with unchanging ‘profit shares’ based on their current salary, allowing them to avoid employment tax liabilities.
To address this, from 6 April 2014, HMRC introduced rules to stop this planning and classify certain LLP members as employees for tax purposes if all three of the following conditions were met:
a. The member provides services to the LLP and is remunerated for those services to the extent of 80% or more by way of ‘disguised salary’, the quantum of which does not vary by reference to the overall profitability of the LLP.
b. The member does not have significant influence over the affairs of the LLP.
c. The member’s capital contribution to the LLP is less than 25% of their ‘disguised salary’.
The application of these conditions is complex, both because of the underlying nature of the legislation and the environment in which partnerships operate. While Conditions A and C are largely financial tests, Condition B has been subject to debate due to its subjective nature.
All but the simplest and smallest LLPs have a hierarchy of members with different rights and responsibilities and LLPs operating in the financial fund or other financial markets have incredibly complex arrangements between the members. The legislation itself is brief and leaves much unsaid. HMRC published guidance on the rules but it left uncertainties and in any event is not the law.
The Court of Appeal Decision
The decision of the Court of Appeal in HMRC v BlueCrest Capital Management (UK) LLP, 17 January 2025 concerned the meaning of Condition B and whether the question of significant influence could be considered with regard to ‘de facto’ influence, which may not necessarily derive from the LLP Agreement or any other formal agreement governing the rights and duties of the members and/or the operations of the LLP.
The HMRC Partnership Manual currently says:
In looking at whether or not an individual member has significant influence it is important not only to look at the written agreement, but also to look at how the LLP operates in practice.
If the written agreement is not being followed and on a realistic view of the facts, the member does exercise significant influence over the affairs of the LLP as a whole then [the member will not be a salaried member because] Condition B is not satisfied.
However, the Court of Appeal adopted a strict literal approach to the statutory interpretation of Condition B, finding that the statutory language is “clear and unambiguous” and that the “significant influence over the affairs of the partnership” required to fail Condition B “must derive from, and have its source in, the mutual rights and duties of the members of the LLP as determined by the legally binding statutory and contractual framework governing the LLP” – which the Court recognised will generally be as set out in, or determined by the terms of the relevant LLP Agreement. Therefore, even if a member exercises influence in practice, it will not meet Condition B unless that influence is explicitly recognised in the LLP’s governing framework.
Implications for LLPs
The main takeaway from this ruling is the importance of having in place a comprehensive LLP Agreement that clearly sets out the mutual rights and duties of members (including reference to other sources such as members’ handbooks) and a defined governance and decision-making structure for the LLP.
LLPs that rely on Condition B for their members’ tax treatment should assess and review the terms of their LLP Agreement (and other documentation referred to in the agreement) to ensure that the basis for determining the “significant influence” of such members is set out in the terms.
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