In HMRC v Bluecrest Capital Management (UK) LLP [2023] UKUT 110, the Upper Tribunal found that one of the three conditions that categorise LLP members as deemed employees, the lack of significant influence over the affairs of the LLP, was not met by the traders and portfolio managers, meaning they were not subject to PAYE and NICs.

  • The BlueCrest Group is involved in worldwide financial asset management. Bluecrest Capital Management (UK) LLP (Bluecrest) is a mixed-member LLP that is part of the Group.
  • Bluecrest acts as a 'sub-investment manager', managing funds for the rest of the group and also providing support services, such as legal, finance and IT. 
  • The Limited Liability Partnership (LLP) was rewarded by way of an 18-20% return based on the performance of the investment managers.
  • It has never had any direct employees. It employs its more junior investment managers and many of the back-office staff (c.200 staff in total) via a service company.
  • Bluecrest’s members are split into three categories:
    • Infrastructure members (support/back office including department heads).
    • Discretionary traders/portfolio managers including desk heads. Portfolio managers were allocated an amount of capital and had discretion over how it was invested. Anyone with more than a junior position generally managed over $100 million in capital and was considered to have significant influence over the business.
    • Other front office members (researchers/technologists).  
  • The members received remuneration in three ways:
    • Priority distributions. These were, in essence, fixed salaries and agreed as such by the parties.
    • Discretionary allocations. These discretionary, performance-based payments could never total more than the allocated net profits of the LLP.
    • Income point allocations. These payments came from whatever profits were left. These were not considered as part of the appeal.
  • HMRC raised determinations across five tax years for a total of £199,233,648 in PAYE and National Insurance Contributions (NICs) on the basis that the Salaried Members' rules applied to the discretionary allocations. These rules, applied by s.863A - S863G ITTOIA 2005, were designed to remove the presumption of self-employment for LLP members who had disguised their Employment status by being a member. Bluecrest appealed.
  • The FTT applied the three conditions that had to exist in order for the deemed salary rules to apply:
    • Condition A: At least 80% of their reward for the performance of their services as a member of the LLP is 'disguised salary', fixed or variable, without regard to the overall profits/losses of the partnership.
      • It was agreed that the priority distributions met this condition. 
      • The FTT decided that this condition was also met by the discretionary allocations.
    • Condition B: The mutual rights and duties of the members of the LLP and of the partnership and its members do not give them significant influence over the affairs of the partnership.
      • The FTT decided that the portfolio managers did have a significant influence due to the amounts of capital they managed. 
    • Condition C: They have no significant money investment in the LLP i.e. their contribution is less than 25% of their disguised salary. It was agreed by the parties that this condition was met.

HMRC appealed against the finding that Condition B did not apply to the portfolio managers and Bluecrest cross-appealed that Condition A should not apply any remuneration. The UT found that:

  • The FTT judge had adequately considered the legal distinction between employees and traditional partners, to the extent it was relevant. More importantly, he applied the wording of Condition B to the facts of the case.
  • Reference to the affairs of the partnership and the required influence was not restricted by the legislation. Influence does not have to mean over the entire affairs. Significant influence can mean over any part of the partnership's affairs, and be general, financial or operational. Imposing restrictions would mean the operation of Condition B would create unusual and unintended results.
  • The portfolio managers were akin to partners and were fundamental to the core activity of the business. Capital allocations of over $100 million indicated significant influence in absolute terms.
  • Bluecrest failed to discharge the burden of showing the allocations were calculated with reference to profits and losses. The FTT judge gave adequate reasoning as to why he found that the allocations were calculated without such reference.

Both the appeal and cross-appeal were dismissed.

Useful guides on this topic

Salaried members: When is a partner taxed as an employee?
In some circumstances, LLP members are taxed as employees under PAYE. When does this apply? 

Mixed members: Partnerships with company members
What is a mixed-member partnership? How are profits of a mixed-member partnership taxed? What tax adjustments are required? Are there any relieving provisions?

Employment status: Partners
What is the employment status of a partner in a partnership or a member of an LLP? Are partners/members employed or self-employed?

Running an LLP in tandem with a company
It is possible to run a Limited Liability Partnership (LLP) or another form of partnership in tandem with a company. Partnerships can also have corporate partners. What needs to be considered?

External link

HMRC v Bluecrest Capital Management (UK) LLP [2023] UKUT 110

Bluecrest Capital Management (UK) LLP v HMRC [2022] TC8529 

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