Salaried Members Rules for LLPs: The BlueCrest Supreme Court Decision

The salaried members rules have generated uncertainty for LLPs since 2014. The Supreme Court's first ruling on them narrows one of the most heavily relied-upon defences, and every LLP member structure built around informal or de facto influence needs re-examining.

Why This Decision Matters

The salaried members rules at sections 863A to 863G ITTOIA 2005 have applied since 2014, deeming certain LLP members to be treated as employees for tax purposes unless they can show all three statutory conditions are met. In practice, Condition B, the significant influence exclusion, has been one of the most heavily litigated and commercially important routes by which senior LLP members have sought to demonstrate genuine self-employed status. BlueCrest is the first time the Supreme Court has addressed the rules directly, and its narrow reading of what counts as significant influence has immediate practical consequences well beyond the investment management sector in which the case arose.

The Three Conditions

An LLP member is treated as a salaried member, and so taxed broadly as an employee, unless the member can demonstrate that all three of the following conditions are met, each requiring a separate, fact-specific assessment.

• Condition A: it is not the case that at least 80% of the member's remuneration for their services to the LLP is disguised salary, meaning it is fixed, or variable without reference to the overall profits or losses of the LLP, in substance functioning like a salary rather than a genuine profit share.
• Condition B: the mutual rights and duties of the LLP and its members do give the member significant influence over the affairs of the LLP as a whole, rather than merely over a discrete part of its business.
• Condition C: the member's capital contribution to the LLP is not less than 25% of the disguised salary reasonably expected to be paid to that member for the relevant tax year.

Meeting any one of these three conditions is sufficient to take the member out of salaried member treatment; BlueCrest concerned Conditions A and B specifically.

The BlueCrest Facts

BlueCrest Capital Management (UK) LLP was an investment management business in which portfolio managers were LLP members whose remuneration was calculated substantially by reference to the performance of their own individual trading portfolios. HMRC contended that these members should be treated as salaried members, arguing that their remuneration structure met the disguised salary test under Condition A, and that any influence they exercised over the LLP's affairs fell short of the "significant influence" required to satisfy Condition B, since much of their day-to-day discretion related to their own trading books rather than to the strategic direction of the LLP as a whole.

What the Supreme Court Held on Condition B

The Supreme Court held that significant influence for the purposes of Condition B cannot rest solely on de facto influence exercised in practice; it must comprise legally enforceable rights and duties arising under the terms of the LLP agreement itself. The Court clarified, however, that this is not confined to express terms set out on the face of the agreement: terms may properly be implied into the LLP agreement, and authority may be validly delegated pursuant to a wider governance framework the LLP has put in place, such as a management committee structure operating under powers the LLP agreement confers. What will not suffice is influence that exists only informally, through practice, reputation, or the member's evident importance to the business, without a legally enforceable foundation.

The Court further clarified that the influence in question must be high-level or strategic, relating to the affairs of the LLP as a whole, rather than day-to-day operational responsibility, even where that operational responsibility involves high-value or commercially critical decisions. A portfolio manager's authority over their own trading book, however large and however central to the LLP's profitability, is operational in this sense, and does not by itself demonstrate the kind of strategic influence over the LLP's affairs generally that Condition B requires.

What the Supreme Court Held on Condition A

On Condition A, the Supreme Court held that remuneration calculated mainly by reference to a member's own individual portfolio performance, rather than the overall profits or losses of the LLP as a whole, can still meet the disguised salary test. The fact that pay varies with performance does not, by itself, take remuneration outside Condition A if that variability is tied too narrowly to the individual's own output rather than genuinely reflecting the LLP's overall financial results, since the statutory concern is with whether the reward functions, in substance, like a variable salary rather than a true share of collective profit or loss.

Remittal to the First-Tier Tribunal

Although the Supreme Court's judgment settles the legal test to be applied under both Condition A and Condition B, it did not itself determine how that test applies to BlueCrest's own portfolio managers on the facts. The case has been remitted to the First-tier Tribunal to apply the clarified legal framework to the specific rights, duties, and governance arrangements actually in place at BlueCrest, meaning the ultimate factual outcome for BlueCrest itself remains to be determined, even though the governing legal principles are now settled at the highest level.

Practitioner Application

• Audit LLP agreements for the legal basis of any claimed significant influence. Where a member's influence rests on practice, seniority, or informal authority rather than express or properly implied rights in the LLP agreement, or validly delegated authority under a documented governance framework, Condition B is now materially harder to satisfy following BlueCrest.
• Distinguish operational authority from strategic influence explicitly in any LLP governance documentation; authority over a member's own book, team, or discrete area of the business, however commercially significant, is unlikely to satisfy Condition B on its own.
• Review remuneration structures tied to individual performance metrics against Condition A in light of BlueCrest's confirmation that individual-performance-linked pay can still be disguised salary; genuine exposure to the LLP's overall profits and losses remains the safer ground.
• Consider whether Condition C, the capital contribution route, offers a more strong alternative where Condition B is now harder to establish on the LLP's existing governance structure, since satisfying any one condition is sufficient.
• Expect increased HMRC compliance activity on existing LLP structures that have historically relied on Condition B, now that the Supreme Court's narrower reading gives HMRC a stronger evidential basis to challenge influence claims not clearly grounded in the LLP agreement.

Frequently Asked Questions