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HMRC’s New Approach to LLP’s

There is a turning point in LLP tax status and the meaning of “Significant Influence”. The Court of Appeal has handed down a notable judgment in BlueCrest Capital Management (UK) LLP v HMRC [2024] EWCA Civ 711, casting light on the application of the salaried members rules. 

The interpretation of Condition B in this case could have significant implications for LLPs, particularly in professional and financial services sectors. The salaried members rules were introduced to prevent individuals who function, in all material respects, as employees from enjoying the tax advantages afforded to genuine partners. To that end, the legislation provides that a member of an LLP will be treated as an employee for income tax purposes unless all three conditions, Conditions A, B, and C, are satisfied.  

Although the principal focus of this case was Condition B, BlueCrest also cross-appealed in relation to Condition A, arguing that its remuneration arrangements were linked to overall firm profitability. The Court rejected this argument, confirming that remuneration must be entirely dependent on LLP profits to fall outside the scope of disguised salary. Bonus structures tied to individual performance, management discretion, or team results are likely to fail this test, however common such arrangements may be in modern LLPs. 

Understanding the Salaried Member Rules 

Since its introduction, the salaried member rules have been used by HMRC to determine whether LLP members should be taxed as employees rather than self-employed partners.  

A member of an LLP is treated as a salaried member and taxed like an employee if all three conditions are met.

First, if most of their pay is fixed or not based on the LLP’s overall profits.

Second, if they don’t have “significant influence” over how the LLP is run, such as decision-making on strategy or operations.

And third, if they have put in less than 25% of their expected annual income as capital into the LLP.  

If all three apply, HMRC sees them as more like an employee than a true partner. Failing to meet just one of these conditions means the individual is not a salaried member and is instead taxed as self-employed.   

At issue in the BlueCrest case was the extent to which certain senior members of the LLP could be said to exert “significant influence” over the affairs of the LLP, thereby satisfying Condition B and preserving their status as partners for tax purposes. 

The Court’s Reasoning- Influence Must Be Legal, Not Merely Practical 

The Court of Appeal overturned both the First-tier and Upper Tribunals’ decisions, adopting a more restrictive interpretation of Condition B. Crucially, the Court held the source of influence must be legal or contractual, arising from mutual rights under the LLP agreement.  

Practical influence, no matter how significant, is insufficient if it is not backed by formal rights. Influence must apply to the affairs of the LLP as a whole, not just individual units. This narrows the scope of Condition B.  

The Court distinguished between positional authority, respected in practice, and legally recognised influence under the LLP’s constitutional arrangements. It clarified that influence must be tested as a matter of right, not merely factually. 

Practical Consequences of the Decision for LLP’s 

The Court’s interpretation may have far-reaching implications. Many LLPs, particularly in legal, consulting, and asset management sectors, designate members as “partners” despite them having no equity stake or formal governance rights.  

This ruling ultimately sets a higher bar for meeting Condition B. LLPs can no longer assume that senior or high-earning members automatically have significant influence simply because of their practical involvement in day-to-day operations.  

If their influence is not embedded in the LLP agreement or does not affect the broader direction of the firm, they may fall within the salaried member rules and therefore become liable for PAYE and NIC as employees. 

The decision also calls into question the reliability of HMRC’s previous guidance on practical influence, which may no longer apply. 

The Road Ahead for LLP’s 

The matter has now been remitted to the FTT to be determined considering the Court of Appeal’s decision. However, an appeal to the Supreme Court remains a distinct possibility. Should such an appeal be lodged, proceedings before the FTT may be stayed pending final resolution. 

LLP’s should not wait for further judicial clarification before reviewing their governance arrangements.  

What LLP’s Need to Do  

Considering the BlueCrest decision, LLPs should reassess their governance structures, roles, and tax status to avoid potential conflicts with HMRC. 

LLPs should: 

  • Review agreements to ensure any claim to influence is legally grounded, not simply based on an individual’s seniority or role. 

 

  • Reassess the classification of salaried members, especially those who do not sit on governing bodies or possess formal voting rights over the firm’s affairs

Let’s Talk 

Our team can assist with Reviewing LLP agreements considering the BlueCrest decision.  We would be happy to discuss your specific circumstances and give an initial assessment.

Contact us by using the Book a Meeting button on this page or contact us by phone or email. 

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