The Supreme Court has provided important clarification on the interpretation of the salaried member rules in BlueCrest Capital Management (UK) LLP v HMRC.

While the case has been remitted to the First-tier Tribunal (FTT) to reconsider the application of those principles to the facts, the judgment is likely to be of interest to LLPs across the financial services sector and beyond, as it provides important guidance on Conditions A (disguised salary) and B (significant influence).

Background

Introduced in 2014, the salaried member rules are intended to ensure individuals who are, in substance, employees, cannot obtain tax advantages simply by becoming members of an LLP. A member will be treated as an employee for tax purposes where all three statutory conditions are met:

• Condition A - At least 80% of the member’s expected remuneration is disguised salary.

• Condition B - The member does not have significant influence over the LLP's affairs.

• Condition C - The member's capital contribution is less than 25% of their disguised salary.

The BlueCrest litigation has now been considered by every level of the UK tax appeals process, culminating in the Supreme Court.

Throughout the case, Condition A was consistently decided in HMRC's favour. However, the position on Condition B changed as the case progressed. While the FTT and Upper Tribunal initially found partially in BlueCrest's favour, the Court of Appeal held that the wrong legal test had been applied and sent the issue back to the FTT. The Supreme Court has now confirmed that the issue should be reconsidered by the FTT when applying the interpretation of Condition B explained by the Court of Appeal.

What did the Supreme Court decide?

Condition A – disguised salary

The Supreme Court agreed with HMRC that the relevant members' remuneration constituted disguised salary for the purposes of Condition A. It rejected the argument that a cap linked to overall LLP profits was sufficient to create a variable profit-sharing arrangement.

The judgment reinforces that remuneration driven primarily by individual performance will not fall outside Condition A merely because overall LLP profits limit the amount payable.

The decision is therefore likely to be of particular interest to LLPs where members’ remuneration reflects a combination of individual contribution and overall firm profitability.

Condition B – significant influence

The Supreme Court confirmed that the focus should be on a member's legally enforceable rights and duties within the LLP's governance structure, rather than their practical, operational or commercial influence. Those rights and duties may arise directly from the LLP agreement or through authority formally delegated under it. It did not determine whether BlueCrest's senior portfolio managers and desk heads ultimately satisfy Condition B, and that question will now return to the FTT.

The judgment indicates that formal governance rights are key, rather than investment responsibilities, profitability or commercial importance, when assessing Condition B.

Why does this matter for asset managers?

The BlueCrest case concerned senior investment professionals with substantial capital allocations and investment responsibilities. The judgment will therefore be of particular interest to asset managers operating through LLPs, especially where investment professionals are rewarded through performance-related profit allocations and governance of the LLP is concentrated within a relatively small management group.

The Supreme Court has clarified the legal framework, but the practical application of that framework remains to be tested when the case returns to the FTT. The eventual outcome will be closely watched across the sector.

What should LLPs be considering?

While the application of the Supreme Court's guidance to BlueCrest's members remains to be determined by the FTT, the judgment provides an opportunity for LLPs to revisit their existing salaried member analysis.

In particular, firms may wish to consider:

• Whether their current assessment of the salaried member rules remains appropriate in light of the Supreme Court's interpretation of Conditions A and B.

• Whether LLP agreements and other constitutional documents accurately reflect how the LLP is governed and managed in practice.

• Whether remuneration arrangements continue to support the intended tax treatment of members.

Condition C – capital contribution

Although much of the focus following BlueCrest has been on Conditions A and B, firms should also remember that salaried member status depends on all three statutory conditions. Condition C (capital contribution) was not in dispute in BlueCrest and remains an important part of the analysis for many LLPs.

Given the potential PAYE and National Insurance implications where the salaried member rules apply, firms should ensure that their analysis and supporting documentation remain robust.

HMRC guidance

Finally, BlueCrest also serves as a reminder that HMRC's published guidance represents HMRC's interpretation of the legislation and is not binding on the courts.

Looking Ahead

With the Condition B analysis returning to the FTT, the practical application of the Supreme Court's guidance remains unresolved, meaning the BlueCrest litigation is not yet at an end.

The salaried member rules remain in force and firms must continue to operate within the existing framework. If you would like to discuss how the current rules apply to your members, the potential impact of the BlueCrest decision on your business, or any engagement with HMRC in this area, please contact your usual Buzzacott representative or a member of our Financial Services Tax team.