Posted by Raj Chavda is a senior associate at Legal Futures Associate O’Connors [1]
Chavda: LLP agreement drafting crucial
Last week, the Supreme Court handed down its long-awaited judgment in HMRC v BlueCrest Capital Management (UK) LLP [2]. For anyone advising professional services firms on LLP structuring – asset managers, law firms, accountancy practices, consultancies – and of course for those in LLPs themselves, this is an essential read.
The salaried members rules (found in the Income Tax (Trading and Other Income) Act 2005) 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 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; and
- 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
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. Revisit ‘made-up’ memberships granted for retention or optics: elevating high performers to LLP membership without a corresponding, enforceable governance role increases PAYE/National Insurance exposure rather than mitigating it.