BlueCrest v HMRC: Supreme Court rules on employment status of LLP members for UK tax purposes

When is a partner not a partner (for tax purposes, at least)? On 1 July 2026, the Supreme Court handed down its much-anticipated decision in HMRC v BlueCrest Capital Management (UK) LLP [2026] UKSC 18, providing further guidance on that question. 

Specifically, the case concerned the application of the UK’s “salaried member” rules (SMRs), which deem LLP members to be employees for UK tax purposes in certain circumstances.  Despite the SMRs having been in force for over 10 years, BlueCrest is, to date, the only published case dealing with the substance of the rules, and the Supreme Court’s decision therefore provides further useful guidance on their scope and interpretation.

While the decision will be of particular interest to those in the investment management sector, it is of wider relevance to all businesses operating through UK LLPs, or which contain UK LLPs within their group structure. Those businesses may wish to review their historic SMR positions in light of the decision, and to assess whether any further steps should be taken to manage SMR risk for current and future periods.

Background

Individuals who are members of a UK LLP are, by default, treated as self-employed for UK employment tax purposes.  One key consequence of this status is that the UK LLP is not liable for employer’s national insurance (NI) contributions (or growth and skills levy) on distributions to those members. 

Without more, this may incentivise businesses to engage personnel as LLP members rather than as employees, even where the substance of the relationship between the relevant individual and the business is more akin to a traditional employment relationship.  With employer NI rates recently having increased from 13.8% to 15%, the NI benefits of engaging personnel in this way have become increasingly significant.

The SMRs – which apply solely to UK-incorporated LLPs – seek to address this, by overriding the presumption of self-employment where the relationship between an individual member and UK LLP does not (put broadly) ‘look like’ a partnership relationship.  The rules test this through a set of three cumulative conditions, which (as the Supreme Court put it) “sought collectively to encapsulate three typical factors for distinguishing a traditional relationship of partnership…from a relationship more like employment”.  Somewhat counterintuitively, a member (“M”) must ‘fail’ at least one of those conditions to fall outside the SMRs, and for their self-employment status to be respected for UK tax purposes:

• Condition A looks at how M is remunerated. Broadly, to ‘fail’ this condition, it must be reasonable to suppose that less than 80% of M’s expected remuneration from UK LLP, over a specified forward-looking period, will be ‘disguised salary’ (i.e., amounts which are fixed, are variable without reference to the profits or losses of UK LLP (for example, a performance bonus), or are not in practice affected by the overall amount of those profits or losses).
• Condition B looks at the level of ‘influence’ which M has over the ‘affairs’ of UK LLP.  For this condition to be ‘failed’, “the mutual rights and duties of the members of the [LLP], and of the [LLP] and its members” must give M “significant influence over the affairs of the [LLP]”.
• Condition C looks at the amount of capital which M has at risk in UK LLP.  Broadly, to ‘fail’ this condition, M’s ‘contribution to’ UK LLP must be at least 25% of M’s ‘disguised salary’ in any given year.

Aside from a relatively narrow issue on Condition A (discussed below), BlueCrest centred on the proper interpretation of Condition B.  In a 2022 decision, the First-tier Tribunal concluded that while some of BlueCrest’s members did not have the requisite ‘significant influence’, members who were ‘portfolio managers’ with a capital allocation of $100m or more, and ‘desk heads’ who supervised a number of portfolio managers, would ‘fail’ Condition B.  Broadly, that was because, through those roles, those members had material ‘de facto’ influence over operational and financial matters which were ‘absolutely fundamental to the core activity’ of BlueCrest as a sub-investment manager.  That view was upheld by the Upper Tribunal, and HMRC then appealed to the Court of Appeal (CoA).

Right up until the CoA hearing itself (and reflecting the position in HMRC’s guidance), it was accepted by both parties that ‘de facto’ influence (i.e. influence arising other than through the formal rights and obligations of the LLP and its members) could be taken into account for the purposes of Condition B.  However, the CoA rejected that view, concluding instead that the influence which ‘qualifies’ for Condition B purposes must “derive from, and have its source in, the mutual rights and duties of the members of the LLP…as conferred by the statutory and contractual framework”.  On that basis, the CoA took the view that ‘de facto’ influence, which does not derive from those rights and duties, could not be taken into account.

The Supreme Court’s decision – Condition B (‘significant influence’)

In its decision, the Supreme Court largely endorsed the decision of the Court of Appeal on Condition B.  In doing so, however, the decision provides useful guidance on how Condition B should be applied.

To summarise the key points:

• ‘Qualifying influence’:  For influence to ‘qualify’ for Condition B purposes, it must derive from the mutual (legal) rights and duties of the LLP and its members.  In many cases, those will be set out in full in the LLP Agreement (LLPA).

  As a consequence, ‘de facto’ influence (for example, the material influence which may be exercised, in practice, by a particularly long-tenured or high-billing partner who does not have any formal management role) does not qualify.  Similarly, influence exercised by a partner indirectly (for example, as a director in a corporate member of UK LLP) is excluded.  However, this ‘non-qualifying’ influence may ‘dilute’ members’ qualifying influence, and so reduce the likelihood of that influence being ‘significant’.  This may mean that it is difficult for any individual member to fail Condition B where (for example) the UK LLP forms part of a wider group, where management decisions are in practice taken at the group level and then implemented at the LLP level via a corporate member which holds a majority of member voting rights.

  Helpfully, the Supreme Court made clear that the direct source of a member’s ‘qualifying influence’ does not need to be enshrined in the LLPA itself, provided the source of that influence is ultimately traceable back to the terms of LLPA.  This would mean, for example, that influence exercised via a delegation of authority contemplated in the LLPA, or through a member’s appointment to a specific role envisaged in the LLPA, may qualify.

• ‘Significant influence’:  ‘Influence’ simply describes the ability to participate in important decisions capable of affecting the affairs of the LLP or the way those affairs are conducted (whether or not that influence is actually exercised).  For that influence to be “significant”, it must have “practical and commercial substance in the conduct of [the LLP’s] affairs in the real world” – although M need not have the “ability or power to control the LLP’s affairs or determine a particular course of action”.
• ‘The affairs of the partnership’: In general, the focus for Condition B will be on ‘managerial’ or ‘strategic’ decision-making, as opposed to more operational day-to-day decisions or matters which affect the financial position of the LLP (however significant those are to the LLP as a whole). However, the court did not rule out the possibility that influence over other matters may be relevant in particular cases.  Helpfully, the court also made clear that the existence of ‘reserved matters’ in an LLPA, over which a particular member or members have a veto, would not in itself prevent all other members from holding ‘significant influence’.    

The Supreme Court’s decision – Condition A (‘disguised salary’)

On Condition A, the dispute centred on whether one particular component of the remuneration paid to BlueCrest’s portfolio managers represented ‘disguised salary’.  In short, the issue was as follows: where that remuneration is calculated on an ‘eat what you kill’ basis (i.e., based on the profitability of a member's own trading activity), but the resulting provisional profit distributions are subject to a ‘cap’ at the total amount of UK LLP profits (and so are reduced where there are insufficient profits to cover all of those provisional distributions), does that cap provide the necessary ‘variability’ to prevent that remuneration from being ‘disguised salary’?

In the Supreme Court’s view, the answer to that question was “no”.  Given that Condition A was intended to encapsulate one key aspect of what it typically means to be a partner, on a purposive reading of Condition A, it could not be said that the ‘cap’ made the relevant remuneration (sufficiently) variable by reference to LLP profits. 

An ‘influential’ development?

Notwithstanding that the Supreme Court has upheld the decision of the CoA, the fact that the CoA’s approach to Condition B (which initially came as a surprise to many, given it had not been raised at the FTT or UT) has been largely endorsed by the Supreme Court is itself significant.  The decision also provides helpful further guidance on how ‘significant influence’ should be identified and measured.

What now? 

Now that the principles for applying Condition B are relatively clear, businesses operating through UK LLPs (or which have UK LLPs in their structures) should review their SMR positions in light of the Supreme Court’s decision – particularly where partners have historically been treated as outside of the SMRs solely on the basis that Condition B is failed, or had been relying on Condition A being failed solely on the basis that partner distributions were capped at total LLP profits.  Those businesses may also wish to review their existing partnership arrangements, to manage any ‘go forward’ SMR risk and ensure that partners’ self-employment status continues to be respected (for example, by ensuring that influential partners’ roles are properly ‘enshrined’ in the terms of the LLPA, or that partners have contributed sufficient capital so as to fail Condition C).

More generally, a number of SMR enquiries have been opened by HMRC on a ‘protective’ basis, but then largely parked behind the BlueCrest litigation.  Aside from the ongoing uncertainty and accruing interest exposure which this creates for businesses, these delays have the potential to exacerbate generational issues between partners if a significant NI liability for historic periods subsequently crystalises in the hands of the current partner group.  Now that the BlueCrest litigation is over, businesses with open SMR enquiries may seek to use the decision as a springboard for re-engaging with HMRC on those enquiries.

If you would like to discuss any of the points raised in this blog post in further detail, please contact the authors or your usual Freshfields contact.