News & Views

HMRC v BlueCrest: The Supreme Court redraws the line between member and employee in LLPs

On 1 July 2026, the Supreme Court handed down its long-awaited judgment in HMRC v BlueCrest Capital Management (UK) LLP. For anyone advising professional services firms on LLP structuring – asset managers, law firms, accountancy practices, consultancies – this is an essential read.

The Salaried Members Rules (found in the Income Tax (Trading and Other Income) Act 2005) (“Rules”) seek to identify cases of ‘disguised employment’ in Limited Liability Partnerships (“LLPs”). Under these Rules, members of an LLP are treated as employees for tax purposes if three conditions (A to C) are met:

• Condition A – whether the member is rewarded for their services through a ‘disguised salary’ that is fixed or varied without reference to the profits or losses of the LLP.

• Condition B – whether the member lacks significant influence over the affairs of the LLP.

• Condition C – whether the member's capital contribution is below 25% of their disguised salary.

The judgment is concerned with the meaning of Conditions A and B.

Condition A – Disguised Salary

Under the Rules, Condition A is satisfied where at least 80% of expected remuneration of an LLP member is fixed, or variable without reference to overall LLP profits/losses. The Court held that remuneration calculated by reference to an individual's own portfolio or desk profits still falls within this test, even where a firm-wide profit figure operates as a backstop cap on individual awards. A cap that merely limits downside exposure does not create the kind of substantive link to overall profits needed to escape "disguised salary" characterisation.

Condition B – Significant Influence

Condition B received the most substantial clarification from the Court. The Court held that:

• Qualifying influence must derive from legally enforceable mutual rights and duties – the LLP agreement, statute, or other binding instruments or delegations derived from the LLP agreement. De facto influence, however real in practice, is excluded if it lacks such a source. This overturns the tribunals' approach below, which had treated "realistic" or de facto influence as sufficient.

• "Significant" imports a requirement of real practical and commercial substance, not merely nominal or token participation.

• Influence deriving from personal qualities, strong performance, client relationships, or financial contribution to profits (i.e. rainmaking) does not qualify, however commercially significant.

• "Affairs of the partnership" carries a broad meaning encompassing the partnership's business, interests, and management generally – not merely the member's own book or department.

• Influence confined to operational or day-to-day decision-making within one part of the business, even a core part, is insufficient; the requisite influence is likely to be managerial or strategic in character, reflecting a genuine ‘voice in the management’ of the partnership as a whole.

Practical Takeaways and Structuring Considerations

• LLP Agreement drafting is now determinative for Condition B: the constitutional document - not day-to-day practice - is the primary evidential source. Firms should audit governance clauses (management, delegation, committee membership, voting and information rights) against desired tax outcomes for each membership tier.

• For members intended to qualify as genuine partners: ensure strategic influence is expressly documented – LLP board or executive committee membership, voting rights on reserved matters, or clearly delegated managerial authority traceable to the LLP Agreement. Informal consultation or attendance at meetings without formal appointment is unlikely to suffice.

• Delegation chains matter: rights sub-delegated from the LLP Board to committees or individual role-holders can count towards Condition B, provided the chain of authority is traceable to the LLP Agreement. Firms should ensure delegation instruments are properly documented and not left as informal practice.

• Remuneration architecture for Condition A: profit-linked caps designed only as downside protection (rather than genuine profit-sharing formulae tied to firm performance) will not prevent a finding of disguised salary. Firms wishing to preserve partner status for high earners should consider remuneration structures with genuine, formulaic exposure to overall firm profitability, not merely individual-desk profits subject to a firm-wide ceiling.

•  Audit existing membership categories: given the remittal, firms with tiered membership structures (junior/fixed share/equity members, desk heads, etc.) should proactively review whether documented rights match the practical narrative previously relied upon and consider whether amendments to the LLP Agreement are needed to align formal entitlements with intended tax treatment.

• Distinguish role scope from role performance: a member who performs brilliantly in a narrow operational function will not, on this authority, acquire Condition B protection through that performance alone. The right to participate in strategic decisions is what counts.

• Stress-test remuneration formulas: bonus pools or discretionary allocations calculated primarily against individual or team profitability – common in asset management firms – are vulnerable under Condition A even where a firm-wide cap exists on paper.

• Revisit "made-up" memberships granted for retention or optics: elevating high performers to LLP membership without a corresponding, enforceable governance role increases PAYE/NIC exposure rather than mitigating it.

How can O’Connors help

BlueCrest will now be the leading authority on Conditions A and B for the foreseeable future. For firms that have used LLP status as much for its tax profile as its governance substance, this judgment is a prompt to ensure the two are properly aligned – not just at the top table, but throughout the membership structure.

O'Connors can help LLPs across the professional services, financial services and other regulated sectors on:

• Governance framework review – assessing whether committee structures, delegated authority and decision-making rights are properly documented and capable of evidencing genuine influence over the LLP's affairs as a whole and not just a discrete department or practice group.

• Member agreement review and drafting – auditing existing LLP agreements against the BlueCrest standard and amending provisions on voting rights, management responsibilities and profit allocation so that Condition B analysis is supported by clear, legally enforceable terms rather than informal practice.

• Remuneration structure analysis – reviewing profit-sharing, bonus and discretionary allocation arrangements to identify where remuneration may in substance fail Condition A and advising on restructuring to strengthen the link between individual pay and overall LLP profits.

For further information please email Raj Chavda or call 0151 906 1000.