The Court of Appeal (‘COA’) issued its judgement in the case of HMRC v BlueCrest Capital Management (UK) LLP on 17 January 2025.

Following the Upper Tier Tribunal decision which interpreted that Condition B of the salaried member rules may cover more members than HMRC had previously considered. HMRC appealed the decision to the COA. The COA have now decided in favor of HMRC and the case has now been sent back to the First Tier Tax Tribunal (‘FTT’) to reconsider based upon their ruling. The decision once again highlights the difficulty in determining how the conditions should be applied. We await the outcome of the FTT’s further review of the BlueCrest case and there will no doubt be further developments to come.

The current rules

The salaried member rules treat LLP members as employees for tax purposes if all the following three conditions are met:

1. If at the relevant time it is reasonable to expect that at least 80% of the total amount payable by the LLP for the individual’s services in individual’s capacity as a member of the LLP will be ‘disguised salary’. This includes payments which are either fixed, variable but without reference to the overall profit or loss, or is not in practice affected by the overall amount of profits or losses of the LLP.
2. The mutual rights and duties of the individual do not have significant influence over the affairs of the LLP.
3. The individual’s capital contribution is less than 25% of the amount of the disguised salary it is reasonable to expect the member to receive.

Court of Appeal judgement

The COA determined that both sides and the FTT and Upper Tier Tax Tribunal (‘UTT’) were content to proceed on the basis that HMRC’s published guidance on Condition B was correct in accepting the possibility that qualifying influence could be taken from a source outside the mutual rights and duties of the members and the LLP, as set out in the LLP Agreement or any contractually binding variation or supplement thereto. The CoA held the view that both tribunals had erred in law accepting the wider construction of Condition B which is reflected in HMRC’s published guidance.

The CoA considered that the FTT had approached its examination and evaluation of the evidence on the mistaken basis that the necessary qualifying influence on the affairs of the LLP could be found not only in the LLP Agreement.  The CoA determined that any other sources of enforceable mutual rights and duties, including any de facto arrangements which were in place from time to time, however informal and whether or not they were legally enforceable must be taken into consideration.

It should be noted that the COA did agree with the FTT and UTT in their consideration of Condition A.

In light of the above, the COA set aside the decision of the UTT and sent the case back to the FTT to reconsider.

Impact of Court of Appeal decision

The COA have narrowed their interpretation of Condition B in comparison with the FTT and UTT. As a result, LLPs may have to reconsider their application of the conditions under their current processes and policies. This decision once again highlights the difficulties with considering the conditions under the salaried member rules. We will now await the decision of the FTT as it reconsiders the case.

How we can help

As we represent a number of LLPs, our team has in-depth experience and knowledge of the salaried member rules. Please do not hesitate in contacting your normal HaysMac Financial Services contact or the Employment Taxes Team.