In its judgment dated 17 January 2025, the Court of Appeal in HMRC v BlueCrest Capital Management (UK) LLP [2025] EWCA Civ 23 has adopted a narrow interpretation of Condition B of the salaried members rules and held that for an LLP member to have the “significant influence over the affairs of the partnership” contemplated by Condition B, that member’s influence must derive from, and have its source in, the statutory and contractual framework governing the operation of the LLP (in most cases, this will be determined by the terms of the LLP Agreement).  

The Court allowed HMRC's appeal, overturning previous rulings by the First-tier Tribunal and Upper Tribunal, and emphasised that significant influence must be determined based on the rights and duties specified in BlueCrest’s LLP Agreement. 

The ruling diverges from the broader interpretation set out in HMRC's own guidance (which emphasised the importance of considering actual (de facto) influence notwithstanding the terms of the LLP Agreement) and should act as a prompt for LLPs to review their LLP Agreements to ensure that the intended mutual rights and duties between members, and the governance and decision-making arrangements for the LLP, are sufficiently established in the agreed contractual terms.

Case summary 

• In HMRC v BlueCrest Capital Management (UK) LLP [2025] EWCA Civ 23 the Court of Appeal has allowed HMRC’s appeal on Condition B of the salaried members rules, finding that both the First-Tier Tribunal and Upper Tribunal had erred in law and that the correct construction of the statutory language requires the question of “significant influence” to be determined based on the rights and duties specified in BlueCrest’s LLP Agreement.

• The Court's decision centred on the interpretation of Condition B under the salaried members rules (see the heading ‘Salaried members rules’ below for a brief summary of the legislative basis and terms of the rules).

• The Court adopted a strict literal approach to the statutory interpretation of Condition B, finding that the statutory language is "clear and unambiguous" and that the “significant influence over the affairs of the partnership” required to fail Condition B must derive from, and have its source in, the mutual rights and duties of the members of the LLP (both between the members themselves and the LLP and its members) as determined by the legally binding statutory and contractual framework governing the LLP – which the Court recognised will generally be as set out in, or determined pursuant to, the terms of the relevant LLP Agreement, particularly where, as in the present case, such agreement includes an “entire agreement” clause and excludes the application of the default provisions under regulations 7 and 8 of the LLP Regulations 2001.

• The Court’s narrow approach to the requisite source of what it termed “qualifying influence” diverges from the broader purposive interpretation set out in HMRC's published guidance and previously accepted by the First-tier Tribunal and Upper Tribunal – that broader interpretation recognising that the question of significant influence could be considered with regard to actual (de facto) influence, which may not necessarily derive from the LLP Agreement or any other formal agreement governing the rights and duties of the members and/or the operations of the LLP.

• The Court acknowledged that whilst “non-qualifying influence” over the affairs of the LLP, such as de facto influence or influence arising pursuant to informal arrangements (including where held by non-LLP members), would be excluded from counting for the purposes of Condition B, such influence would “remain highly material” in deciding whether the “qualifying influence” is significant.

• The focus of the Court’s decision was in determining the true construction of the statutory language and the requisite source of influence that should be included within a Condition B assessment. However, the Court did also consider to a limited extent the scope and meaning of “significant influence”, stating (in the leading judgment of Sir Launcelot Henderson):

• “But it may at least be said that the requisite influence, as well as having its source in the mutual rights and duties, must also be exerted “over the affairs of the partnership”.  In this context, the affairs of the partnership seem to me to connote the affairs of the partnership generally, viewed as a whole and in the wider context of the Group.  The affairs of the LLP are broader than, although they include, the business of the LLP”;

• “… a focus on decision-making at a strategic level, rather than on how individual members perform their duties in conducting the Business, seems to me to accord better with the basic purpose of Condition B, …”; and

• “…the shade of meaning contemplated is a degree of influence over the partnership’s affairs which is more than insignificant, and which has practical and commercial substance in the conduct of those affairs in the real world”. 

• The Court’s interpretation of the statutory language and commentary on the scope of significant influence would seem to reverse the broader approach adopted in the First-tier Tribunal and Upper Tribunal, where it was recognised that influence over a part of the LLP’s business and influence of a financial or operational nature could qualify.

• In allowing HMRC’s appeal on Condition B, the Court has set aside the decision of the Upper Tribunal and remitted the case to the First-tier Tribunal for reconsideration applying the correct test (as determined by the Court of Appeal).

• Given the significant sums involved, and the previously wider interpretation that was accepted by both parties, reflected in HMRC’s guidance, and adopted in the decisions of the First-tier Tribunal and Upper Tribunal, a request by BlueCrest for permission to appeal to the Supreme Court would not be a surprise.

Implications for LLPs

The decision emphasises the importance of having in place a comprehensive and up-to-date LLP Agreement that: 

1. sets out the mutual rights and duties of members and the governance and decision-making arrangements for the LLP; and/or 

2. establishes on a legally binding basis any additional sources for such mutual rights and duties and/or governance and decision-making arrangements (for example, where set out in supplemental handbooks, policies or procedures).

LLPs who rely on certain members failing Condition B should review the terms of their LLP Agreement (and any other contractual or statutory terms governing the operation of the LLP) to ensure that the basis for determining the “significant influence” of such members is established in or pursuant to the contractual terms. 

Interaction of the judgment with HMRC guidance

By focusing so heavily on the terms of the LLP Agreement and relegating the importance of a fact-based analysis of the LLP's operation, the Court’s decision is unequivocally narrower than HMRC's own interpretation of Condition B as reflected in HMRC's manuals. This is what paragraph 256200 of the HMRC Partnership Manual currently says:

"In looking at whether or not an individual member has significant influence it is important not only to look at the written agreement, but also to look at how the LLP operates in practice. 

If the written agreement is not being followed and on a realistic view of the facts, the member does exercise significant influence over the affairs of the LLP as a whole then [the member will not be a salaried member because] Condition B is not satisfied."

It seems highly likely that this guidance will be changed.  Taxpayers who have relied on the guidance when entering into LLP Agreements should review those agreements in light of the Court's ruling.

We are waiting for any indication of how HMRC will respond to this decision in terms of retrospective challenge. Will it attempt to enforce the Court of Appeal's interpretation of Condition B historically, despite HMRC's own guidance saying something very different at the time?

In the event of a retrospective challenge, there may be limited protection for taxpayers if they can show that (i) they definitely relied on the HMRC guidance, and (ii) it would be very unfair for HMRC to go against that guidance. The potential remedy is judicial review of HMRC's decision to challenge the historic position. However, the courts have repeatedly made it clear that the conditions for this remedy represent an extremely high bar for taxpayers to overcome.

The judgment is also of relevance to LLPs who rely on Condition B as a secondary argument to members failing Conditions A or C, and comes at a time of some uncertainty regarding condition C, following the updates made by HMRC in early 2024 to its guidance on the interaction of the targeted anti-avoidance rule and Condition C. It is understood that HMRC is reviewing that guidance and further news is awaited.

Salaried members rules

The ‘salaried members’ legislation is found in sections 863A to 863G of the Income Tax (Trading and Other Income) Act 2005, as inserted by section 74 of, and Schedule 17 to, the Finance Act 2014. 

The rules were introduced to counter the perceived avoidance of income tax and National Insurance contributions by certain members of LLPs who might otherwise be treated as employees for tax purposes.

The rules establish three conditions (Conditions A, B and C). If all conditions are satisfied by an individual member, that individual will be taxed as an employee. Conversely, if an individual member fails one or more of the conditions, that individual will be taxed as self-employed (which can result in a significant saving of employer’s National Insurance).

The three conditions can be summarised broadly as follows:

Condition A - it is reasonable to expect that at least 80% of the individual member's total remuneration is "disguised salary" (being remuneration which is (i) fixed, (ii) variable, but varied without reference to the LLP's overall profits or losses, or (iii) not in practice affected by the LLP's overall profits or losses);

Condition B - the mutual rights and duties of the members of the LLP do not give the individual member significant influence over the affairs of the partnership; and

Condition C - the individual member's capital contribution to the LLP is less than 25% of their expected "disguised salary" for the tax year.