The Supreme Court has delivered its long-awaited judgement in HMRC v BlueCrest LLP, providing the first definitive guidance from the UK's highest court on the interpretation of the salaried member rules contained in the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005).

The decision is of considerable importance to limited liability partnerships (LLPs) and their advisers, particularly those operating in the investment management and professional services sectors, as it clarifies when LLP members should be treated as employees for tax purposes.

The salaried member rules were introduced with effect from 6 April 2014 to tackle what HMRC viewed as ‘disguised employment’. Their purpose is to ensure that individuals who are, in substance, employees cannot obtain the tax advantages of self-employment simply by becoming members of an LLP. Where the rules apply, the individual is treated as an employee for income tax and National Insurance contributions (NIC) purposes, requiring the LLP to operate PAYE and account for employer's NIC.

The BlueCrest dispute

BlueCrest LLP is an investment management business whose members included portfolio managers responsible for managing substantial investment portfolios, together with members carrying out operational and support functions. HMRC argued that many of these individuals met the statutory conditions to be treated as salaried members and should therefore be taxed as employees. BlueCrest maintained that they were genuine LLP members carrying on business on their own account.

The litigation has been progressing through the courts since 2022 and is reported to involve tax liabilities of approximately £200m. While the First-tier Tribunal and Upper Tribunal largely found in favour of BlueCrest on one aspect of the legislation, the Court of Appeal disagreed and remitted the case to the First-tier Tribunal. The Supreme Court has now upheld the Court of Appeal's interpretation, providing important clarification of the law.

Understanding the salaried member rules

An LLP member is treated as an employee only if all three statutory conditions are satisfied.

• Condition A considers whether the member receives what is effectively a disguised salary. Broadly, this applies where at least 80% of the member's expected remuneration is fixed, varied without reference to the overall profits or losses of the LLP, or is not, in practice, affected by those profits or losses
• Condition B examines whether the member has significant influence over the affairs of the LLP
• Condition C considers the member's capital at risk in the LLP by comparing it with their expected disguised salary. The condition is satisfied where, at the relevant time, the member's capital contribution is less than 25% of the amount that it is reasonable to expect the LLP to pay them as disguised salary for services performed in their capacity as a member.

It was accepted throughout the proceedings that Condition C was satisfied, so the dispute focused entirely on the interpretation of Conditions A and B.

Condition A – genuine profit sharing versus disguised salary

The Court observed that members' remuneration was determined almost entirely by the performance of their own investment portfolios rather than the profitability of BlueCrest as a whole. Although successful portfolio performance undoubtedly contributed to the LLP's overall profits, this did not amount to sharing in the profits of the partnership in the traditional sense.

The judges emphasised that the legislation is intended to distinguish genuine entrepreneurial partners from individuals who are simply rewarded for their own performance. A traditional partner shares in the collective fortunes of the business, benefiting when the firm performs well and sharing the downside when it performs poorly. By contrast, BlueCrest's remuneration model rewarded members primarily for their own individual results.

BlueCrest argued that members' remuneration remained linked to overall partnership profits because payments were subject to an overall profit cap. However, the Court found that this restriction carried little weight because the LLP had consistently generated sufficient profits for the cap never to operate in practice. A theoretical limitation that never affects remuneration cannot create a genuine connection between members' earnings and the LLP's overall profitability.

In reaching this conclusion, the Supreme Court confirmed that the legislation requires a practical assessment of how remuneration operates in reality rather than focusing solely on the contractual wording. The decision reinforces that Condition A is intended to identify genuine profit-sharing arrangements rather than remuneration structures that merely preserve a nominal connection with partnership profits.

Condition B – significant influence over the affairs of the LLP
The Supreme Court confirmed that the relevant influence must arise from the member's legal rights and obligations under the LLP agreement or from authority formally delegated under that agreement. Informal influence, however substantial in practice, is not sufficient.

This distinction proved crucial, as many of BlueCrest's portfolio managers controlled investment portfolios worth hundreds of millions of dollars and exercised considerable commercial responsibility. Nevertheless, the Court concluded that responsibility for managing valuable trading portfolios does not equate to influencing the affairs of the LLP itself.

The judges drew a clear distinction between managing part of the business and participating in the governance of the partnership. Significant influence requires a meaningful role in directing or controlling the affairs of the LLP as a whole rather than responsibility for day-to-day operational decisions, however commercially important those decisions may be.

The Court also recognised that influence need not always arise directly from express provisions within the LLP agreement. Where the agreement permits management powers to be formally delegated, members exercising those delegated powers may still possess significant influence. However, the authority must ultimately be traceable to the LLP's constitutional arrangements rather than arising merely from custom, seniority or commercial standing.

Another important aspect of the judgement concerns voting rights. Although BlueCrest's individual members possessed voting rights, a corporate member held sufficient votes to dominate the decision-making process. The Court considered that voting rights which carry little practical ability to influence the governance of the LLP are unlikely to demonstrate significant influence for the purposes of Condition B.

Practical implications for LLPs

The judgement has implications far beyond the investment management industry. Many professional services firms, including accountancy, legal and consulting practices, operate LLP structures where members are rewarded largely by reference to their own fee generation or business performance. Equally, governance arrangements often concentrate decision-making powers in a relatively small management group.

The Supreme Court's decision makes clear that LLPs should look carefully at both their remuneration structures and their governance arrangements. Members who are rewarded primarily for their own performance, rather than sharing in the overall profits of the business, are more likely to satisfy Condition A. Similarly, members whose influence arises through reputation, commercial success or informal leadership, rather than legally enforceable governance rights, may satisfy Condition B even if they are highly respected within the organisation.

The decision also highlights the importance of ensuring that governance arrangements accurately reflect the commercial reality of the business. If LLPs intend certain members to fall outside the salaried member rules, they should ensure that those members possess genuine and enforceable governance rights rather than relying on informal influence or operational responsibilities.

Although the Supreme Court has settled the legal principles, the BlueCrest litigation is not yet over. The case will now return to the First-tier Tribunal to determine, by applying the correct legal test, whether particular members possessed sufficient formal influence to fail Condition B. However, Condition A has now been conclusively determined against BlueCrest and will not be reconsidered.

The judgment provides long-awaited certainty for advisers and LLPs alike. It confirms that the salaried member rules are concerned with substance rather than labels and that genuine partnership status depends upon meaningful participation in both the economic risks and governance of the business.

For LLPs that have not reviewed their structures since the salaried member rules were introduced in 2014, now would be an appropriate time to do so. A careful review of LLP agreements, governance arrangements and remuneration policies may help identify potential exposure before HMRC does.

Given the significant PAYE and employer's NIC liabilities that can arise where the rules apply, the BlueCrest decision serves as a timely reminder that the distinction between partner and employee depends not on job title or commercial importance, but on the legal rights and financial arrangements that underpin the relationship.

More information

Read the ACCA article 'LLP salaried member’s tax rules'

Read HMRC's guidance on Salaried Member provisions in the Partnership Manual