
The BlueCrest case, which began in 2022, is the first case where the application of the ‘salaried member’ legislation has been examined by the tribunals and now the CoA. This legislation, introduced in 2014, sets out three conditions that results in an individual LLP member being taxed as an employee, rather than self-employed, if they all apply. Broadly, the conditions are:
BlueCrest had claimed their members failed conditions A and B.
While the judgement in respect of condition A has been consistent throughout – only being failed where there is a clear link between the LLP’s overall profits and how the member’s profit share is calculated –both the First-tier Tribunal (FTT) and Upper Tribunal (UT) previously found that some of the members failed condition B, even though they could only significantly influence particular aspects of the LLP’s affairs.
The CoA found that informal or de facto influence will not be sufficient to fail condition B, but rather the legally enforceable rights and duties of a LLP member would need to be considered, whether contractual as part of the LLP agreement, or statutory by the default provisions within the Limited Liability Partnerships Act 2000 (LLPA 2000).
The case will now be remitted to the FTT for reassessment unless an appeal is launched to the Supreme Court by BlueCrest within 28 days of the decision. This would inevitably be a long drawn-out process that could take a couple of years. While this leaves the position uncertain, in the interim we still expect HMRC to use the CoA narrowing of significant influence to challenge other LLPs. The risk will be heightened for individual members of LLPs who rely solely on failing this condition.
This decision should hopefully impact smaller LLPs to a lesser extent, where all members are required under the LLP agreement or statutory provisions within the LLPA 2000 to significantly influence the LLP’s affairs as a whole. It is however a much harder test for members of medium/larger sized LLPs to fail, particularly where only a small number of members sit on the management board that has responsibility for the overall strategy and affairs of the LLP.
Although HMRC changed its guidance on condition C last year, in that genuine capital contributions made with the sole purpose of avoiding the ‘salaried member’ rules would be disregarded. We understand that following an internal review by HMRC this change in guidance will now be reversed.
The ever changing HMRC guidance, and the CoA decision, highlights the need for LLPs to carefully consider which of the conditions their members fail, if they are to avoid being taxed as employees.
We would recommend that all LLPs review and document their ‘salaried member’ position annually as part of the annual compliance process. We would also recommend the rules are reviewed as a separate exercise as and when members are being admitted to the LLP, or either the LLP’s activities, or individual member’s roles and functions change.
Any members relying solely on failing condition B should undertake a review of their position to make sure that there is sufficient evidence to justify this position considering the CoA’s judgment. LLPs may wish to consider amending the terms of the LLP agreement where this does not currently align with the way the firm is influenced by its members.
We expect this decision to result in HMRC looking to challenge the ‘salaried member’ rules more actively than they already have. With employers’ national insurance contributions increasing from April 2025, there will be added incentive for HMRC to use the legislation, and this decision, as reason to try to tax members as employees where there is an element of doubt.
At Buzzacott, we offer formal ‘salaried member’ reviews and can provide advice and support on the conditions, including reviewing the LLP Agreements, or considerations when new members are admitted. While this does not guarantee that HMRC will not enquire into your position, if advice has been taken and can be presented in response to questions raised by HMRC on the ‘salaried member’ rules, this should result in a quicker resolution to a potential enquiry.
If you have any questions about how the ‘salaried member’ rules impact you or your LLP, please fill out the form below and one of our experts will be in touch.