Recent legal and tax developments are reshaping how LLPs should structure their governance, profit-sharing, and tax compliance strategies.
The Court of Appeal’s recent judgment in HMRC v BlueCrest Capital Management (UK) LLP [2025] gives LLPs yet another reason to review their capital, profit-sharing and governance arrangements to ensure they do not fall foul of the salaried members’ rules.
The Court’s judgment makes it harder for LLPs formed under UK law to establish that their members – particularly those who receive a fixed share of the profits – are to be taxed as self-employed, as opposed to employees. The costs of getting it wrong are also due to increase shortly, given the forthcoming increase in employer National Insurance contributions (“NICs”) to 15%.
However, there is positive news coming from HMRC, which has confirmed it will revise its recent guidance on the “targeted anti-avoidance provision” with regard to capital contributions. That guidance was significantly unhelpful to professional services LLPs, as we discussed in our previous article here.
So, in a reversal of the developments we covered in our previous article, there looks to be a shift back to the status quo, with capital contributions remaining the most common means amongst professional services firms of ensuring a fixed share partner is not taxed as an employee.
Understanding salaried members’ rules
Legally, a person cannot be simultaneously a member of an LLP and its employee.
However, from a tax perspective, the salaried members rules mean that an LLP member can be taxed as though he or she was an employee, if certain conditions are met.
To be taxed as self-employed, an LLP member must meet at least one of the following three hallmarks of partnership:
- Condition A: At least 20% or more of their remuneration must vary in line with the LLP’s profits
- Condition B: They exert “significant influence” over the affairs of the LLP (this is the central focus of the Court of Appeal’s judgment in BlueCrest)
- Condition C: They contribute a capital contribution of greater than 25% of his or her expected fixed profit share.
If an LLP member cannot meet any of the three hallmarks of partnership their remuneration will be subject to tax and NICs as an employee. This is means income tax and NICs will need to be deducted at source by the LLP and accounted to HMRC in accordance with the PAYE regulations which apply to employees, along with employer’s NICs, which are soon to be 15%.
LLPs should ensure that they record the basis of their assessment of their members’ tax status, given the costs of getting it wrong, which will also include penalties and interest for late payments.
What the BlueCrest Ruling means for LLPs?
In the BlueCrest case, the Court of Appeal was tasked with deciding which of the members of BlueCrest Capital Management (UK) LLP had “significant influence” under Condition B. Those members which met the threshold for significant influence would have rightly been taxed as self-employed members.
As we reported at the time, the tribunal below had considered that significant influence could be found where a member had de facto responsibility over a significant aspect of the business of the LLP, and not necessarily centralised managerial influence over the whole business nor formal legal powers under the LLP’s members’ agreement or other constitutional arrangements.
Influence was not to be restricted to the narrow legalistic meaning of the term, which would allow members who significantly influenced either the investment activities of the LLP or the provision of back-office services to the LLP to be taxed as self-employed under Condition B.
However, the Court of Appeal, in reversing the Upper Tribunal’s decision, has drastically narrowed this interpretation. The Court unanimously held that the Upper Tribunal’s decision should be reversed, and the judgment noted as follows:
In my judgment, the wording of Condition B is clear and unambiguous… It seems to me a rational legislative purpose that the type of influence over the partnership’s affairs which should qualify in this context is influence grounded in the legally binding constitutional framework of the partnership, and that influence from other sources, including… de facto influence … should not qualify, although its nature and extent may well be relevant to the separate question whether the qualifying influence of an individual member is “significant”
This reduces the scope for LLPs, particularly large firms, to rely on the influence of their members as a means of ensuring they are taxed as self-employment.
Another key takeaway is that, where a member does enjoy significant influence over the business as a matter of practical reality, the drafting of the LLP’s members’ agreement should reflect this in detail.
Revised HMRC guidance on capital contributions (Condition C)
Condition C allows LLP members to be taxed as self-employed if they contribute not less than 25% of their fixed profit share as capital to the LLP. This is a common approach of many LLPs to avoid fixed share partners being taxed as salaried members. The capital must be genuinely at risk, rather than in the nature of a loan.
In order to maintain the 25% minimum, proposed increases in a member’s fixed share of the LLP’s profit may need to be accompanied by an increase in his or her total capital contribution. There is no grace period to contribute increased capital if an existing member’s remuneration is increased beyond four time the existing capital contribution.
This is one reason why it has been common practice to require partners to maintain sufficient capital to provide a buffer to account for remuneration increases.
However, changes to HMRC guidance in its Partnership Manual in 2024 cast serious doubt on this approach, since HMRC considered that shifting capital contributions to keep up with a member’s remuneration – rather than the working capital needs of the LLP – is likely to be caught by the anti-avoidance provision in the rules. This was a highly significant development which we covered at the time (see our discussion here).
It was nevertheless unclear as to where HMRC would draw the line between taking the salaried member rules into account when topping up capital contributions and falling foul of the new guidance on the application of the targeted anti-avoidance rule (“TAAR”). If caught by the TAAR, the additional capital contributions would be disregarded for the purposes of the calculation as to whether Condition C is met or not.
However, last month HMRC agreed to amend its guidance. In a statement to the Chartered Institute of Taxation, it said:
HMRC’s position remains that the TAAR applies if the main purpose, or one of the main purposes, of the arrangements is to secure that the Salaried Member Rules do not apply. … In relation to Condition C specifically, HMRC also accept that an arrangement which results in a genuine contribution made by the individual to the LLP, intended to be enduring and giving rise to real risk will not trigger the TAAR. This means that a contribution made under a top-up arrangement will not, in HMRC’s view, trigger the TAAR if the arrangement results in a genuine contribution made by the individual to the LLP, intended to be enduring and giving rise to real risk. We are therefore intending to amend our guidance in the Partnership Manual…
This means, in a return to the status quo ante, that increases to members’ capital contributions over time as a means of ensuring continued compliance with Condition C should not be caught by the TAAR, provided that the contribution is one of capital which is genuinely at risk.
Practical steps for LLPs
Once an assessment has been made as to whether a member should be taxed as an employee or self-employed, the LLP should ensure that the basis on which that judgment was reached is appropriately documented.
There are a range of documents that LLPs will have or generate that should support the judgment as to a member’s status. These might include:
- an up-to-date members’ agreement setting out management roles – and details as to the degree of influence which these confer – as well as the basis of partner remuneration;
- financial information, such as profitability targets and forecasts; and
- other records relating to remuneration, such as management or remuneration committee minutes.
Contact us
If you have any questions about these issues in relation to your own organisation, please contact a member of the professional services team or speak to your usual Fox Williams contact.
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