Salaried member rules: Supreme Court decision in BlueCrest

The Supreme Court has held that on a true construction of Condition B, it is only those enforceable rights and duties that arise from the LLP agreement, statute or elsewhere that may be taken into account in determining whether a member has significant influence over the affairs of the LLP: HMRC v BlueCrest Capital Management (UK) LLP [2026] UKSC 18. In taking into account the de facto influence wielded by members with capital allocations of $100m or more, the FTT and UT had made an error of law and the correct procedure was now to refer the matter back to the FTT for a decision based on the correct interpretation of the law.

The Court also rejected the cross-appeal by BlueCrest that the remuneration allocated to relevant members in the form of discretionary allocations was variable by reference to the profits or losses of the partnership simply on the basis that it would not be paid if the partnership did not have sufficient profits as a whole.

The decision is highly significant in the context of the salaried member rules. Current HMRC guidance is not overtly prescriptive (noting that Condition B refers to "those individuals who... merely work in the business rather than carry it on" and suggesting that it is a multifactorial test), though in practice the guidance and examples adopted by HMRC largely seek to focus on and highlight the management aspects of an LLP. The decision of the Supreme Court (and the Court of Appeal before it) will, however, require affected taxpayers to focus very clearly on the rights and duties which arise from the LLP agreement or other sources that give rise to enforceable rights and duties, rather than more generally in the running of the LLP’s business. Any wider influence arising from outside those “rights and duties” will, in principle, not be relevant in considering the application of Condition B to a particular member, although may be taken into account in determining whether that member’s influence is significant or not. As a result, having a significant influence on the core operations of the business (in this case investment management) is unlikely to be sufficient in itself to take relevant members outside the scope of the salaried member rules.

Background

The salaried member rules (contained in ITTOIA 2005 sections 863A to 863G) were introduced in 2014 and designed to remove the presumption of self-employment for some members of LLPs and so tackle the disguising of employment relationships through LLPs. Prior to their introduction, there had been extensive discussions regarding the application of the proposed rules in practice, including in the context of asset management businesses, some of which was ultimately reflected in HMRC's published guidance and which has been periodically updated since then.

The rules apply where HMRC determines that the nature of the relationship between a member and the LLP with which they are concerned meets each of three conditions.

• Condition A is met if at the relevant time it is reasonable to expect that at least 80% of the amount paid by an LLP to an individual member is disguised salary. That includes amounts which are variable but vary without reference to the overall amount of the profits or losses of the LLP, or are not, in practice, affected by the overall amount of those profits and losses.
• Condition B is met if the mutual rights and duties of the members of the LLP do not give a member significant influence over the affairs of the LLP.
• Condition C (which was not an issue in this appeal) relates to the size of an individual member's capital contribution to the LLP.

Somewhat counter-intuitively, failure to meet one or more of such conditions will mean that the relevant member continues to be taxed on the basis of self-employment, rather than employment.

HMRC determined that the salaried member rules applied to certain members of BlueCrest in respect of a period covering a number of years. In particular, HMRC sought to apply the rules to two broad categories of member:

• discretionary traders or portfolio managers, including desk heads (portfolio managers). Portfolio managers were responsible for managing an investment portfolio as part of the investment management services provided by the appellant to BlueCrest group entities. Portfolio managers were allocated an amount of capital and had discretion as to how to invest that capital allocation; and
• infrastructure members and other front office members (non-portfolio managers). These were, broadly, the members who were responsible for providing the support or back-office services, such as technology, facilities, legal and compliance or very experienced researchers or technologists responsible for managing teams such as quant research teams and computer modellers.

Typically, such members received allocations made up of three elements:

• Priority distributions: individual members receive a fixed amount each month. The maximum priority distribution for each individual member was set out in a letter of allocation. For portfolio managers, this was generally £150,000 per year and was paid by way of monthly drawings.
• Discretionary allocations determined at the discretion of the Board. The discretionary allocations could not exceed the total profits available for that purpose in a given year.
• Income point allocations: any remaining profits after discretionary allocations were allocated between members by reference to the "income points" held by each member.

It was accepted that the priority distributions fell within the salaried member rules as disguised salary and the income points allocations fell outside that definition. In HMRC's determination, however, the discretionary allocations made at the discretion of the Board also fell to be treated as disguised salary. As regards significant influence, HMRC was not persuaded that the relevant members generally exercised the necessary degree of influence in order to fail Condition B, given the nature of their role and the overall position of the LLP in the wider BlueCrest group.

BlueCrest appealed these determinations to the FTT arguing that neither Condition A nor Condition B were met. As regards Condition A, BlueCrest argued that the allocations did depend on the profitability of the LLP as a whole. As regards Condition B, BlueCrest argued that (a) all of the non-portfolio managers and (b) each of the portfolio managers with capital allocations of $100 million or more exerted "significant influence" over the affairs of BlueCrest.

Decisions of the lower courts

On Condition B, the FTT held that members of an LLP that managed significant portfolios of investments and/or who were desk heads did not fall within the salaried member rules by virtue of failing that condition. The FTT accepted the appellant's submission that "significant influence" for the purposes of these rules included significant financial influence and was not limited to management influence, as HMRC had asserted. However, BlueCrest had not shown that non-portfolio members exerted significant influence, either individually or as a whole.

On Condition A, the FTT held that remuneration would not be variable within the meaning of Condition A where the link between the remuneration and the profits of the partnership was simply that the remuneration would not be paid, or would be reduced, in circumstances where the partnership had insufficient profits to pay them. That was the case even if that provision was a term of the contract. Such an indirect link was insufficient.

The UT essentially held that the FTT had been entitled to reach the conclusions that it had around “significant influence” on the facts and rejected HMRC’s arguments that there had been any error of law in the FTT’s approach. It also endorsed the FTT’s approach to Condition A.

HMRC appealed the decision concerning portfolio managers on Condition B and BlueCrest cross-appealed the application of Condition B with regard to the population of non-portfolio managers/desk head members should HMRC win its appeal. BlueCrest also contended that the decision of the FTT and UT with regard to Condition A was incorrect.

In contrast, the Court of Appeal took a different approach and held that the FTT and UT incorrectly interpreted Condition B in the salaried members’ rules and referred the case back to the FTT on this issue: BlueCrest Capital Management (UK) LLP v HMRC [2025] EWCA 23. The Court held that on a true construction of Condition B, it is only those enforceable rights and duties that arise from the LLP agreement, statute or potentially elsewhere that may be taken into account in determining whether a member has significant influence over the affairs of the LLP. In taking into account the de facto influence wielded by members with capital allocations of $100m or more, the FTT and UT had made an error of law. The fact that both parties had proceeded before the FTT and UT on the basis that de facto influence could qualify as significant influence for these purposes did not prevent the Court of Appeal applying its own (correct) interpretation of the law. The Court also rejected the argument that the remuneration in the form of discretionary allocations was not variable by reference to the profits or losses of the partnership simply on the basis that it would not be paid if the partnership did not have sufficient profits as a whole.

Decision of the Supreme Court

The Supreme Court has unanimously upheld the decision of the Court of Appeal that the FTT and UT made fundamental errors in their analysis of the Conditions and, therefore, the matter should be remitted to the FTT.

The Supreme Court has adopted a purposive interpretation of the salaried member Conditions. It was clear from the context of their introduction and policy statements made at the time that the three Conditions were designed “collectively to encapsulate three typical factors for distinguishing a traditional relationship of partnership on the one hand from a relationship more like employment on the other hand: rights to profit-sharing, requirement to make a capital contribution, and mutual rights and duties giving significant influence over the affairs of the partnership”. In particular, it was clear that “Condition B derives from the element of the common law test that is concerned with the right to participate in important decisions about the affairs of the partnership – eg rights to vote in the management or governance of the partnership – and should therefore be construed in light of the common law context”.

The Court then turned to the proper interpretation of Condition B, focussing on its various elements including: “mutual rights and duties”; “significant influence”; and “affairs of the LLP”.

Mutual rights and duties

On “mutual rights and duties”, it was clear that the Condition is concerned with the mutual legally enforceable rights and duties conferred by the contractual and statutory framework which governs the operation of the partnership, including any implied contractual terms and any common law or equitable rights and duties. Influence which derives from such rights qualifies for the purposes of Condition B. This approach was also supported by the substantially identical language of “mutual rights and duties” used in LLPA 2000 s.5. Accordingly, where there is a written agreement for the operation of the LLP, that agreement will be the starting point: “it is the ultimate source”. However, the Court stressed that the source of qualifying rights and duties is not limited to the “four corners of the agreement” and has made it clear that the existence of an “entire agreement” clause in an LLP agreement cannot exclude all other sources or be conclusive as to the source of the relevant rights and duties in this context. This matter had not been considered in detail before the Court of Appeal due to the way that the matter arose in that Court.

“We consider that qualifying influence might also derive from the mutually enforceable rights and duties of a member of the LLP pursuant to some delegated authority or by virtue of their appointment to a specific role in the LLP, where, in each case, the relevant right or duty may not be found expressly on the face of the LLP agreement itself but can ultimately be traced back to that agreement. Thus, where rights are delegated under the LLP agreement by all of the members to an executive committee and some of those rights are sub-delegated by the executive committee to a sub-committee or to one or more members, the rights held and exercised by those sub-delegates are capable of constituting the source of qualifying influence of the members inter se and visa-vis the LLP that might result in a failure to satisfy Condition B.”

“This could include the appointment of a member to a particular position within the LLP, including in principle appointment to a position such as a portfolio manager which, like all appointments, is ultimately derived from the agreement between the members inter se and with the LLP itself. This is conceded on behalf of HMRC. The issue is whether the legally enforceable rights and duties derived from governance instruments, delegated authority or from holding a specific role in the LLP, give the member the necessary “significant influence over the affairs of the partnership”.”

However, influence over the affairs of the LLP that cannot be traced back to identifiable contractual, statutory or other legal sources is excluded from consideration, whether that derives from informal, de facto or external arrangements.

Significant influence

Whilst warning against seeking to define ordinary terms such as “significant influence” by other, alternative non-statutory words, the Court considerated that “influence” means that a person must have the ability to influence the affairs of the LLP in the sense of having the right to participate in important decisions capable of affecting the affairs of the partnership or the way the affairs of the partnership are conducted. The Court also approved the Court of Appeal’s suggestions that it must be “a degree of influence… which has practical and commercial substance in the conduct of those affairs in the real world”. The Court has also made it clear that the test for influence must be applied prospectively.

What is critical is that this influence arises from the legally enforceable mutual rights and duties and not simply influence of a shadow member or influence arising from performance or via commercial and business relationships. “Nor is it sufficient that the member has a significant impact on the profits of the business because he or she is an excellent rainmaker or investor.”

Affairs of the LLP

The Supreme Court has held that the affairs of the LLP connotes “the affairs of the partnership generally, viewed as a whole. The affairs of a partnership are broader than, but include, its business”. There was nothing in the provisions to indicate that it did not carry the widest meaning.

BlueCrest submitted that a member might have immediate responsibility over only part of the LLP’s affairs, but the nature of the business and the importance of that part is such that the member has significant influence over the affairs of the LLP overall. The Court rejected this argument.

Given that the purpose of the test set by Condition B is to distinguish between members whose position is like that of a partner in a traditional partnership and those whose relationship with the LLP is more like an employment relationship, the Supreme Court agreed with the Court of Appeal that the focus is likely to be on “managerial” or “strategic” decision-making. However, that does not exclude the possibility that a member may have significant influence over the affairs of the LLP without necessarily being involved in decision-making at a strategic level. “It would depend on the precise circumstances and the nature and extent of the rights and powers given to the member concerned by the LLP agreement and other relevant sources.”

Nonetheless, having regard to the purpose of Condition B and the common law test from which it derives, the Court considered that the requirement that the member has influence over the affairs of the LLP does suggest having “a voice in the management of the affairs of the LLP”. It followed that the influence is likely to lie in rights to participate in high level or strategic decision making about the partnership’s affairs or at any rate, an ability to influence such decisions. In many cases that will be the focus. This means that participation in decision-making at board or strategic and/or management level is likely to qualify, whereas day to day decision making on a purely operational level may well not qualify.

Accordingly, BlueCrest’s argument that significant influence, derived from, or by virtue of, a delegated role on operational or day to day decisions in a particular part of the business, counts for this purpose was incorrect. That argument amounted to saying that performing a role which is important to the business carries with it significant influence over “the affairs of the partnership”, but the Court has held that a member’s influence (even if significant) on the profitability of the business in carrying out their particular role in one part of the business cannot of itself translate into significant influence over the affairs of the LLP taken generally.

The Court also rejected an argument that the existence of reserved decisions to, say, one member, would prevent other members having significant influence. The existence of a veto over certain specified matters would not prevent others having significant influence over the affairs of the LLP.

Ultimately, Condition B looks to whether a member has influence by virtue of rights to participate in important decisions concerning the partnership and its business viewed as a whole. “Standing back and considering the test set by the various parts of Condition B together, the correct approach to Condition B is to start by considering what the LLP does in carrying on its business. The next consideration is whether, by virtue of contractual, statutory and/or other legal or equitable rights and duties qua member in relation to other members and the LLP (including from the formal role and responsibilities given to a member that can be traced back to the LLP agreement) the member is given a voice in decisions affecting the affairs of the LLP as a whole. The requisite qualifying influence is likely to be managerial or strategic influence.”

Application in this case

Applying the Court’s analysis of Condition B to the facts of this case, it was clear that the FTT had erred in law. The FTT had held that significant influence for the purposes of Condition B was not limited to managerial influence and could include influence over one or more aspects of the LLP’s affairs. On this basis, the FTT accepted that portfolio managers with capital allocations in excess of $100m had significant financial influence over the affairs of the LLP and would have a status equivalent to a partner in a traditional partnership. It was common ground before the FTT (and UT) that the Tribunals were entitled to consider the actual position and the inquiry was not restricted to the terms of the LLP agreement. HMRC had agreed that de facto influence was capable of qualifying as significant influence.

On the basis of the Supreme Court’s interpretation of the wording of Condition B, it was clear that the FTT (and UT) had made an error of law. The FTT approached Condition B on the mistaken basis that the necessary qualifying influence could be found outside the contractual or statutory governance framework of the LLP, in de facto arrangements however informal and whether or not legally enforceable. This meant the FTT hardly addressed the terms of the LLP agreement. The Court also criticised the approach of the FTT based on the concept of the role of a partner in a traditional partnership being to “find, mind and grind” as irrelevant to the question to be decided.

The Court noted some of the important clauses in the LLP agreement in this context, noting that essentially the whole conduct of BlueCrest’s business and its affairs is vested in the Board and where relevant an appointed UK ExCo. Other members were only given limited rights, such as rights of consultation and involvement in committees with delegated authority, which were restricted and likely to be inconsistent with an intention to give them significant influence over the partnership’s affairs. However, the Court also recognised that this aspect of the evidence was not fully explored at the FTT and further investigation may be required. As such, the Court of Appeal had been right to remit the case back to the FTT for a further decision on the facts.

Condition A

On the question whether members failed Condition A by virtue of the fact that discretionary allocations were capped by reference to the overall profits of the LLP, the Supreme Court agreed with the courts and tribunals below. Condition A reflects one of the principal characteristics of a traditional partnership, namely that the profits and losses of the partnership are shared between the partners. The purpose of Condition A is to distinguish between what is typical remuneration for a partner and typical remuneration for an employee.

Members’ discretionary allocations were calculated primarily with reference to their individual or team’s investment portfolios’ performance and not the LLP’s overall profits. The receipt by a person of a share of the profits made by that person in the performance of his or her duties on behalf of a partnership, subject to a cap based on the total profits of the firm, would not satisfy the requirements of Condition A and would not itself provide any evidence of a partnership. Whilst BlueCrest’s argument might appear plausible on a purely literal reading of Condition A, it was so far divorced from the Condition’s purpose or from any ordinary reading of its language that it must be rejected.

Comment

The decision of the Court of Appeal in this case was both surprising and perhaps uncontentious at the same time. On the one hand, HMRC had accepted that significant influence could arise from an overall assessment of the relationships between the members themselves and the members and the LLP (albeit that HMRC had argued that that influence must be over the LLP’s affairs as a whole and could not simply arise from financial and operational influence). On the other hand, the Court of Appeal’s interpretation was essentially merely a close reading of the actual words of the legislation, read in context, which specifically refer to the ”mutual rights and duties of the members”. That reading was, however, significantly narrower than the interpretation adopted in practice and in HMRC’s Partnership Manual.

In broad terms, the Court of Appeal’s approach has now been unanimously endorsed by the Supreme Court, although the Supreme Court has also gone further and provided more context on the key features of the Condition B language, and in doing so has addressed some of the more troubling implications of the Court of Appeal’s apparent approach. What is important is that the influence exerted by a member must arise from enforceable rights and duties of some type (which might be implied or statutory or based on common law) and which must bear on the affairs of the LLP as a whole, which will generally require influence on strategic decision making, rather than merely day to day management. De facto influence deriving from a member’s performance in the business will not be sufficient to qualify in this context.

The case will now be remitted back to the FTT to consider whether, correctly interpreted, the BlueCrest members in this case had “significant influence”. In the meantime, all LLPs should consider their position, both historically and going forward. The decision of the Supreme Court adopts a different approach to that set out in HMRC guidance, providing greater context on how the Condition should be applied, and affected businesses should consider whether to review their current LLP arrangements and what actions they may take as a result of this decision.