Limited Liability Partnerships – Court of Appeal’s interpretation of ‘significant influence’ regarding the salaried members rules

In 2000, a new entity was introduced in the form of Limited Liability Partnerships (LLPs). Significantly, unlike general partnerships, an LLP is a corporate body with an identity that is separate from its members but, generally speaking, transparent for tax purposes. Members of an LLP were presumed to be self-employed (like partners of general partnerships) and therefore subject to income tax and national insurance contributions on their share of profits as self-employed individuals. This led to abuse and in 2014, the salaried members rules were introduced.

The salaried members rules provide that where all of the three conditions below are met, an individual member of an LLP will be regarded as a salaried member and the rules of income tax and NICs that apply to an employee will apply to them:

• Condition A: it is reasonable to expect that at least 80% of the total amount payable by the LLP for the member’s services will be ‘disguised salary’ i.e. it is fixed or, if varied, it is varied without reference to or, in practice affected by, the profits or losses of the LLP;
• Condition B: the mutual rights and duties of the members of the LLP and of the LLP and its members do not give the member ‘significant influence’ over the affairs of the partnership; and
• Condition C: the member’s capital contribution to the LLP is less than 25% of the ‘disguised salary’.

Significant Influence

With regard to Condition B, the legislation provides that “the mutual rights and duties of the members of the limited liability partnership, and of the partnership and its members, do not give M (the member) significant influence over the affairs of the partnership”.

However, the legislation does not provide any assistance for determining the mutual rights and duties of members in the context of whether a member has or does not have a significant influence over the LLP’s affairs.

In this regard the HMRC manuals at PM256200 relating to LLP agreements provides “The starting point for Condition B is the LLP agreement. As noted in PM131560, the LLP agreement is wider and includes verbal or implied agreements. 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….”

Amongst other things, this issue arose in HMRC v BlueCrest Capital Management (UK) LLP [2025] EWCA Civ 23. BlueCrest claimed that a number of its members should not be treated as ‘salaried members’ and therefore should be taxed as self-employed partners.

Both the first tier and the upper tribunals took the view that the significant influence referred to in Condition B was not limited to managerial influence and such influence could be over one or more aspects of the LLP’s affairs and need not be over the LLP as a whole.  So, the two tribunals took a wide view, reflecting the view of HMRC in its manuals, which meant that not only the terms of the LLP agreement were to be considered, other aspects and arrangements concerning the operation of the LLP would also need to be taken into account.

On appeal by HMRC, the Court of Appeal held that the two tribunals had erred in law by applying a broad interpretation of Condition B and remitted the case to the first tier tribunal for reconsideration by applying the facts to the legal test determined by the court. The court held that “significant influence over the affairs of the partnership” contemplated by Condition B “must derive from, and have its source in, the mutual rights and duties of the members of the LLP (both horizontally, as between the members themselves, and vertically, as between the members and the LLP) as conferred by the statutory and contractual framework which governs the operation of the LLP”. This meant that in the present case, scope of Condition B was narrow and limited to the terms of the LLP agreement.

The court held that significant influence over the affairs of the LLP should not be assessed beyond the enforceable rights and duties of the members. Unenforceable (i.e., informal or de facto arrangements, even if derived from or relying on a governance framework established by the constitutional documents of the LLP) are not considered qualifying influences.

Moreover, the court also held that for the purposes of Condition B, the influence must be exerted over the affairs of the partnership as a whole and in the wider context of the group, not just a part of it.

With regard to Condition A, in this case, the court agreed with the findings of the two tribunals that the discretionary allocation of profits to the members was ‘disguised salary’.

Our comments

In view of the emphasis given by the Court of Appeal, in the BlueCrest case, to the legal and constitutional framework of the LLP, firms may find it useful to review their core constitutional documents, especially the LLP agreement to see that the members operate in line with the terms of the LLPs as such terms determine the legally enforceable rights and duties of the members.

For further information contact JD Ghosh jd.ghosh@mm-k.com, Stuart James stuart.james@mm-k.com or Paul Norris paul.norris@mm-k.com.

Back to News