Commissioners for His Majesty’s Revenue and Customs v BlueCrest Capital Management (UK) LLP [2026] UKSC 18

HMRC treated most members of BlueCrest, a hedge fund management LLP, as salaried members taxable as employees. The Supreme Court held that only influence derived from members’ legally enforceable rights and duties counts under Condition B. It also held that profit-related bonuses based on personal performance are ‘disguised salary’ under Condition A.

Background

The appeal concerned the ‘salaried members legislation’ in sections 863A to 863G of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), inserted by the Finance Act 2014. Section 863 of ITTOIA 2005 deems members of a limited liability partnership (LLP) carrying on business with a view to profit to be partners for tax purposes. That produced a perceived unfairness: LLP members were taxed as self-employed partners even where their terms were closer to employment. Section 863A reverses that treatment. It deems a member, M, to be employed under a contract of service, but only where all three of Conditions A, B and C are met. Failing any one condition takes the member outside the regime.

BlueCrest is a UK LLP within the BlueCrest Group. It provides sub-investment management and back-office services to the Group’s funds. For the tax years 2014 to 2019, HMRC concluded that all individual members except the four members of the original UK executive committee met the conditions. HMRC issued:

• PAYE determinations of approximately £142m; and
• a Class 1 NICs decision of approximately £55.3m.

It was common ground that Condition C (capital contribution of less than 25% of disguised salary) was met by all individual members. Only Conditions A and B were in issue.

The LLP Agreement

Clause 14.1 of the LLP Agreement vested ‘day to day management and control of the Business and the affairs of the Partnership’ in the Board, whose members were Mr Cox and Mr Dehadray. The Board had to consult members ‘as appropriate on strategic matters’ and hold one members’ meeting a year. Otherwise members ‘shall have no right or authority to act for the Partnership or to vote on matters relating to the Partnership’.

Other relevant features were these:

• Reserved matters required a members’ vote. However, a corporate member, BCUKL, held 100 votes against one vote for each individual member, and there were always fewer than 100 individual members.
• Members’ information rights under clause 14.16 were limited to tax compliance purposes.
• The Board could amend the Agreement without members’ consent.

The proceedings below

The First-tier Tribunal (FTT, Judge Popplewell) held that all relevant members met Condition A. On Condition B, it held that portfolio managers with capital allocations of at least $100m, and desk heads, had significant influence and so failed Condition B. Both parties had agreed that significant influence ‘does not need to be exercised through a formal constitutional procedure, but requires a realistic examination of the facts’. The Upper Tribunal dismissed both the appeal and the cross-appeal.

The Court of Appeal (Sir Launcelot Henderson, with whom Lewison and Arnold LJJ agreed) took a different approach, which it raised itself during the hearing. It held that qualifying influence must derive from, and have its source in, the mutual rights and duties conferred by the statutory and contractual framework. It allowed HMRC’s appeal on Condition B, remitted that issue to the FTT, and dismissed BlueCrest’s cross-appeal on Condition A. BlueCrest appealed to the Supreme Court. Industry bodies (AIMA and the Managed Funds Association) intervened in support of BlueCrest’s position on interpretation.

The issues

• Under Condition B (section 863C), what is the source, nature and scope of the ‘significant influence over the affairs of the partnership’ that the mutual rights and duties must give M?
• Did the FTT make a material error of law in applying Condition B, so that remittal was justified?
• Under Condition A (section 863B, Step 2), are discretionary allocations calculated on individual portfolio or desk profits ‘varied without reference to the overall amount of the profits or losses’ of the LLP? BlueCrest relied on its policy that total LLP profits would cap total discretionary allocations.

The Court’s reasoning

Interpretive approach

Lord Richards and Lady Simler gave the judgment, with which the other Justices agreed. They applied orthodox purposive construction (R(O); Quintavalle; PACCAR), with the statutory words as the primary focus. The pre-legislative material showed that Parliament rejected the common law employment status test. Instead, it adopted a new tripartite test. That test broadly encapsulates three indicators of partnership at common law, drawn from Stekel v Ellice and Tiffin v Lester Aldridge LLP: profit-sharing, capital contribution, and a voice in management.

Condition B derives from the right to participate in important decisions about the partnership’s affairs and should be construed in that light. Two further points shaped the analysis:

• each condition is an objective test to be applied prospectively; and
• each condition must be workable in advance for taxpayers. On this point the Court invoked Lord Nicholls in Spath Holme.

Condition B: source of qualifying influence

The Court held that Condition B is concerned with legally enforceable rights and duties. These include implied terms and common law or equitable rights, and operate both between members and between the LLP and its members:

It is consistent with the legislative purpose that the type of influence over the partnership’s affairs that should qualify in this context is influence founded in the legally binding constitutional framework of the partnership, and that influence from other sources, including de facto influence exercised by members and others, should not qualify (although we recognise that its nature and extent may well be relevant to the separate question whether the qualifying influence of an individual member is “significant”).

This was supported by the near-identical language of section 5(1) of the Limited Liability Partnerships Act 2000 and of regulation 7 of the LLP Regulations 2001.

The Court went beyond the Court of Appeal in one respect. It held that qualifying influence is not confined to the four corners of the LLP agreement. It may derive from delegated or sub-delegated authority, or from appointment to a specific role such as portfolio manager, where the right or duty ‘can ultimately be traced back to that agreement’. An entire agreement clause cannot exclude such sources.

Conversely, influence that cannot be traced to a legal source is excluded. The Court drew a distinction between the scope of a role and performance in it:

This distinction between what is in effect the scope of a role and the performance in that role is consistent with the purpose of the legislation; in a traditional partnership, the scope of an individual’s role in the management of the partnership’s affairs is one of the factors that distinguishes a partner from an employee.

Mr Platt’s pervasive practical influence, through Group-level roles that did not derive from the LLP Agreement, was therefore non-qualifying. It nonetheless remained relevant to whether members’ qualifying influence was ‘significant’.

‘Influence’ and ‘significant’

The Court declined to paraphrase these ordinary words. Influence, rather than control, is the threshold:

It is sufficient if the member has the ability to influence the affairs of the LLP in the sense of having the right to participate in important decisions capable of affecting the affairs of the partnership or the way the affairs of the partnership are conducted, whether through meaningful voting or other rights.

The Court endorsed the Court of Appeal’s description of ‘significant’ as a degree of influence ‘which has practical and commercial substance in the conduct of those affairs in the real world’. It added:

The influence of a shadow member does not qualify, nor does soft power giving rise to an ability to exercise influence.

Influence arising from good performance, client relationships or being an excellent ‘rainmaker or investor’ is irrelevant.

‘Affairs of the partnership’

The phrase bears its widest meaning and refers to the affairs of the partnership viewed as a whole. The focus is likely to be on managerial or strategic decision-making. The Court did not read the Court of Appeal’s para 70 as excluding all other possibilities. It rejected BlueCrest’s argument that significant influence over a core part of the business suffices:

As we have said, the influence must be over “the affairs” of the LLP; day to day management or operational management of only a part of the business, even in relation to a core part, is not sufficient.

The Interveners argued that reserved powers held by one member would prevent anyone else having the necessary influence. The Court rejected this by analogy with class-share vetoes in companies. It gave three reasons for its approach:

• it is the natural reading of the language;
• it is consistent with the parallel the provision draws with traditional partnership; and
• it provides the certainty needed for a test applied prospectively. BlueCrest’s approach ‘would involve difficult evaluative judgments’ that could not readily be made in advance.

Application: material error by the FTT

The Court held that the FTT had proceeded on the mistaken basis that qualifying influence could be found in informal de facto arrangements:

It is unsurprising that this was the approach adopted given the common ground between the parties that a member’s de facto influence could be taken into account for the purposes of Condition B. Nevertheless, it was fundamental to the approach it adopted and was a material error of law.

Ms McCarthy KC, for BlueCrest, argued that the FTT had in substance rooted influence in members’ formal roles. She relied on an external dimension (the portfolio managers’ authority to bind the Fund to trades) and an internal dimension (the clause 19 covenants). The Court rejected this. The FTT had focused on personal qualities and the ‘find, mind and grind’ activities of partners. It had relied on the judge’s own experience as a solicitor-partner:

The comparison drawn by Judge Popplewell with his own experience as a partner in a firm of solicitors was irrelevant and did not illuminate the question he had to decide.

In the Court’s view, the FTT had in effect reversed the statutory test by deriving membership status from influence, rather than influence from membership rights. The FTT made further errors:

• it relied on members’ financial contribution to profits;
• it relied on operational, day-to-day decisions within their part of the business; and
• it treated influence over one core activity as influence over the ‘affairs’ of the partnership.

The FTT had barely examined the LLP Agreement. On its face, that Agreement created a top-down structure vesting responsibility in the Board and leaving little room for other members’ influence. Group ExCo and Mr Platt made the high-level strategic decisions, and portfolio managers were subordinate and closely monitored. The Court accepted, however, that the evidence on consultation and committee-derived rights had not been fully explored. The errors went to the heart of Condition B and could not be regarded as immaterial, so remittal was right.

Condition A

The Court held that Condition A reflects the typical partnership characteristic of sharing in the firm’s profits and losses (Partnership Act 1890, section 2(3); M Young Legal Associates Ltd v Zahid). The 80% threshold allows for profit-based bonuses of up to 20%, which are common in employment.

The portfolio managers’ and desk heads’ discretionary allocations were calculated on the net profit of their own books or desks (typically 18%). They were subject only to a policy cap based on BlueCrest’s total profits, and that cap was never triggered. Such remuneration is typical of employees of fund managers:

While BlueCrest’s argument can just about pray in aid a literal reading of paragraph (b), it is a reading so divorced from the purpose of paragraph (b) or from any ordinary reading of its language that it must be rejected.

The allocations therefore fell within paragraph (b), and paragraph (c) did not need to be considered.

Practical significance

• Source of influence: For Condition B, LLPs and their advisers must now look to the legally enforceable governance framework. This means the LLP agreement and rights traceable to it through delegation or appointment, not commercial reality, seniority or earning power. Delegated authority and role appointments can count, but only where they confer a voice in decisions affecting the LLP’s affairs as a whole.
• Operational roles: Operational autonomy over a part of the business, however commercially important, will not suffice. This is a significant limitation for investment management LLPs, where portfolio managers’ influence is typically operational.
• Drafting: Top-down governance structures that reserve management to a board, and weight voting towards corporate members, are likely to leave individual members within Condition B. LLP agreements will therefore need careful attention.
• Condition A: Remuneration linked to individual or team performance, rather than to the firm’s overall profits, is disguised salary. A theoretical cap based on total firm profits does not take it outside paragraph (b).
• Wider approach: The judgment emphasises purposive construction anchored to the common law indicators of partnership. It also stresses the need for tests that can be applied prospectively and with certainty.

Verdict: The Supreme Court unanimously dismissed BlueCrest’s appeal on both Condition A and Condition B. On Condition A, the portfolio managers’ and desk heads’ discretionary allocations were disguised salary under section 863B(3), Step 2, paragraph (b). On Condition B, the FTT made a material error of law by treating de facto influence as qualifying influence. The issue whether Condition B is satisfied for any or all of the members was remitted to the FTT, as the Court of Appeal had ordered. The remittal order was amended to refer to the Supreme Court’s judgment as well as the Court of Appeal’s. The Court declined to interfere with the Court of Appeal’s direction that no further evidence be filed.

Source: Commissioners for His Majesty’s Revenue and Customs v BlueCrest Capital Management (UK) LLP [2026] UKSC 18