Failing to meet Condition B (and so falling outside the scope of the ‘salaried member’ rules) is more difficult than was previously thought.
From time to time, HMRC gets tax law wrong. Sometimes, taxpayers do. Periodically, the First-tier Tribunal does. Occasionally, the Upper Tribunal does.
However, it’s unusual for the Court of Appeal to find, as it did in HMRC v BlueCrest Capital Management (UK) LLP [2025] EWCA Civ 23 (reported in Tax Journal, 24 January 2025), that HMRC, the taxpayer and both tribunals had all made what is in hindsight a pretty fundamental error in interpreting the law (though, in fairness to the taxpayers, it’s unclear whether they shared HMRC’s overly generous view of the law or simply and understandably acquiesced in it).
The case concerned the LLP ‘salaried member’ rules introduced by FA 2014. Under these rules, a member of an LLP is to be treated for tax purposes as an employee of it if three conditions set out in the statute are all met – so failing to meet any one of the conditions is enough to protect a member from ‘deemed employee’ status.
The main focus of the case was on Condition B. It’s relatively simple: it’s that ‘the mutual rights and duties of the members of the limited liability partnership, and of the partnership and its members, do not give [the member] significant influence over the affairs of the partnership’.
The simple question was thus: did the members in question have significant influence over the affairs of the partnership? If they did, the salaried member rules didn’t apply to them.
But, as the Court of Appeal pointed out, the law doesn’t frame the question in quite that simple way. The right question is, rather: ‘Do the mutual rights and duties of the members of the LLP and of the LLP and its members give the members significant influence over the affairs of the partnership?’ This means that influence which derives from some other source (whether that’s from being the main financier of the LLP or controlling a large and influential client portfolio essential to the LLP or even being able in practice to bludgeon your junior partners into agreeing with you) doesn’t count.
The ‘mutual rights and duties’ are, as the Court of Appeal observed, those conferred by the ‘statutory and contractual framework which governs the operation of the LLP’. Furthermore, ‘the concepts of ‘rights’ and ‘duties’ connote legal enforceability, whether that is to be found in a relevant statute, in the contractual agreement governing the LLP, or in a combination of the two.’
This contrasts with HMRC’s published guidance, which accepts (incorrectly, as would now appear) that:
‘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 Condition B is not satisfied.’ (Partnership Manual at PM256200)
The FTT had found on the facts that the members in question had ‘significant influence’ but had done so ‘on the mistaken basis that the necessary qualifying influence on the affairs of the LLP could be found not only in the LLP Agreement and any other sources of enforceable mutual rights and duties, but also in any de facto arrangements which were in place from time to time, however informal they may have been, and whether or not they were legally enforceable.’ Inevitably, therefore, the Court of Appeal remitted the case to FTT to reconsider the evidence in the light of the correct test.
The importance for advisers and their clients is that it turns out to be somewhat less easy to fail Condition B (and so to be outwith the scope of the ‘salaried member’ rules) than has hitherto been believed. There will in principle be individuals who undoubtedly exercise ‘significant influence’ over the affairs of an LLP but who nonetheless do not fail Condition B because that influence is informal, de facto, or otherwise not founded on the LLP agreement or (to the extent that it has not been disapplied by the LLP agreement) statute.
It is to be hoped that HMRC will not seek to apply the new, stricter, interpretation retrospectively, though one may expect that it would be applied to enquiries which are currently open.
Meanwhile, individuals whose protection from the ‘salaried member’ rules is predicated on failing Condition B should check that the significant influence on which they rely is formalised, documented and enforceable.
Home >Articles > BlueCrest: the CA ruling on Condition B
BlueCrest: the CA ruling on Condition B
Failing to meet Condition B (and so falling outside the scope of the ‘salaried member’ rules) is more difficult than was previously thought.
From time to time, HMRC gets tax law wrong. Sometimes, taxpayers do. Periodically, the First-tier Tribunal does. Occasionally, the Upper Tribunal does.
However, it’s unusual for the Court of Appeal to find, as it did in HMRC v BlueCrest Capital Management (UK) LLP [2025] EWCA Civ 23 (reported in Tax Journal, 24 January 2025), that HMRC, the taxpayer and both tribunals had all made what is in hindsight a pretty fundamental error in interpreting the law (though, in fairness to the taxpayers, it’s unclear whether they shared HMRC’s overly generous view of the law or simply and understandably acquiesced in it).
The case concerned the LLP ‘salaried member’ rules introduced by FA 2014. Under these rules, a member of an LLP is to be treated for tax purposes as an employee of it if three conditions set out in the statute are all met – so failing to meet any one of the conditions is enough to protect a member from ‘deemed employee’ status.
The main focus of the case was on Condition B. It’s relatively simple: it’s that ‘the mutual rights and duties of the members of the limited liability partnership, and of the partnership and its members, do not give [the member] significant influence over the affairs of the partnership’.
The simple question was thus: did the members in question have significant influence over the affairs of the partnership? If they did, the salaried member rules didn’t apply to them.
But, as the Court of Appeal pointed out, the law doesn’t frame the question in quite that simple way. The right question is, rather: ‘Do the mutual rights and duties of the members of the LLP and of the LLP and its members give the members significant influence over the affairs of the partnership?’ This means that influence which derives from some other source (whether that’s from being the main financier of the LLP or controlling a large and influential client portfolio essential to the LLP or even being able in practice to bludgeon your junior partners into agreeing with you) doesn’t count.
The ‘mutual rights and duties’ are, as the Court of Appeal observed, those conferred by the ‘statutory and contractual framework which governs the operation of the LLP’. Furthermore, ‘the concepts of ‘rights’ and ‘duties’ connote legal enforceability, whether that is to be found in a relevant statute, in the contractual agreement governing the LLP, or in a combination of the two.’
This contrasts with HMRC’s published guidance, which accepts (incorrectly, as would now appear) that:
‘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 Condition B is not satisfied.’ (Partnership Manual at PM256200)
The FTT had found on the facts that the members in question had ‘significant influence’ but had done so ‘on the mistaken basis that the necessary qualifying influence on the affairs of the LLP could be found not only in the LLP Agreement and any other sources of enforceable mutual rights and duties, but also in any de facto arrangements which were in place from time to time, however informal they may have been, and whether or not they were legally enforceable.’ Inevitably, therefore, the Court of Appeal remitted the case to FTT to reconsider the evidence in the light of the correct test.
The importance for advisers and their clients is that it turns out to be somewhat less easy to fail Condition B (and so to be outwith the scope of the ‘salaried member’ rules) than has hitherto been believed. There will in principle be individuals who undoubtedly exercise ‘significant influence’ over the affairs of an LLP but who nonetheless do not fail Condition B because that influence is informal, de facto, or otherwise not founded on the LLP agreement or (to the extent that it has not been disapplied by the LLP agreement) statute.
It is to be hoped that HMRC will not seek to apply the new, stricter, interpretation retrospectively, though one may expect that it would be applied to enquiries which are currently open.
Meanwhile, individuals whose protection from the ‘salaried member’ rules is predicated on failing Condition B should check that the significant influence on which they rely is formalised, documented and enforceable.
2734558d-601b-48a3-8ae3-ae3513a00429.tmb-editorspic.jpg?sfvrsn=1fc4692d_1)
