The Supreme Court decision in Bluecrest: attention all LLPs
The Supreme Court recently handed down its decision in HMRC v BlueCrest Capital Management (UK) LLP. The decision is the only published decision on the substance of the salaried member rules, the tax rules that determine whether an LLP member is taxed as a self-employed partner or as an employee. The case gives important guidance on the operation of the rules and is highly significant for UK professional partnerships – particularly, in our experience, for private equity firms operating through LLP structures, as well as professional partnerships in the legal and accounting spaces.
This article gives a brief overview of the key points and the practical implications. Professional partnerships operating through LLPs should review their governance arrangements and ensure that the tax treatment of their members remains correct in light of this decision.
The salaried member rules
The presumption is that individual members of a UK LLP will normally taxed as self-employed – UNLESS three conditions are met. In other words, an individual LLP member will be taxed as self-employed, provided that they ‘fail’ one of the following conditions:
- Remuneration. This condition looks at the extent to which an individual’s remuneration is fixed (on the basis that fixed remuneration, very broadly speaking, is an indicator of employment for tax purposes). The condition is met if it is reasonable to expect that at least 80% of the member’s remuneration over a specific forward-looking period will be fixed or otherwise not genuinely linked to the LLP’s overall profits or losses.
- Influence. This condition looks at the level of influence the individual has over the LLP, with a lack of influence effectively treated as an employment marker for tax purposes. The condition is met if “the mutual rights and duties of the members of the [LLP], and of the [LLP] and its members, do not give [the individual] significant influence over the affairs of the [LLP]”.
- Capital at risk. The final condition looks at an individual’s capital contribution to the LLP in proportion to their remuneration. Broadly, the condition is failed (i.e. an individual will be taxed as a self-employed partner) where the capital contribution amounts to at least 25% of any ‘disguised salary’ in any given year. Disguised salary, very broadly, is remuneration that is not variable by reference to the profits and losses of the LLP.
The Bluecrest case concerned the application of Conditions A and B to portfolio managers – it is the Supreme Court’s decision on Condition B that is of particular relevance to LLPs and their members.
The decision
On Condition A, the appeal concerned the treatment of portfolio managers’ discretionary allocations. These were calculated by reference to profits generated by their individual portfolios or desks. A cap based on the LLP’s total profits did not turn those allocations into a share of overall partnership profits: the remuneration remained analogous to an individual performance bonus and was “disguised salary”.
On Condition B, the Supreme Court confirmed that only influence derived from legally enforceable rights and duties was relevant to applying the condition – in other words, to ‘fail’ the condition and be taxed as a self-employed partner, and individual had to have an enforceable legal right to influence the affairs of the LLP. It was not sufficient (as was the case here) that an individual had de facto influence, derived for example from the revenue generated for the LLP or from personal relationships. Those rights will usually be found in the LLP agreement, but may also arise through delegated authority or a formal appointment traceable back to it. The Supreme Court further clarified that to fail the Condition, the individual must have a voice in important decisions affecting the LLP’s affairs as a whole; that influence is likely to be managerial or strategic and must have practical and commercial substance. Day-to-day operational authority over one part of the business, however important or profitable, will generally be insufficient.
What this means for LLPs and their members
LLPs should review both their constitutional documents and how governance operates in practice. Where tax treatment depends on a member failing Condition B, the LLP agreement and any valid delegations should confer meaningful rights to participate in decisions affecting the firm as a whole; status, authority and profit-sharing provisions should tell a coherent story. Firms should also test remuneration arrangements against Condition A: rewards linked mainly to individual or team performance will not become partnership profit share merely because overall profits impose an ultimate cap. The analysis is member-specific and prospective, so LLPs should revisit it on admission, promotion, changes in role, amendments to governance or remuneration, and other material changes. Members should understand the rights they actually hold—not simply the influence they exercise—and firms should ensure that their tax and payroll treatment follows that legal reality.
If you’d like to learn more about the case, please do also listen to our tax specialist colleagues Elizabeth Small and Heather Corben discuss the case in Talking Tax: When is a partner not a partner?
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