On 17 January 2025, the Court of Appeal released its decision in the BlueCrest salaried member rules (SMR) case on the meaning of the significant influence condition.
By way of reminder, section 863C ITTOIA 2005 provides that an individual will escape salaried member status under Condition B (significant influence) if "the mutual rights and duties of the members of the limited liability partnership, and of the partnership and its members...[give] M significant influence over the affairs of the partnership".
In short, the Court of Appeal decided that an LLP member could
not avoid salaried member status by reason of significant influence
unless that significant influence was conferred in a legally
enforceable way through the terms of the LLP agreement. Significant
influence could not arise "de facto".
We make the following observations on the decision.
- Sir Launcelot Henderson delivered the judgment of the Court. His decision is summarised in the following passage where he stated "it seems clear to me that the "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....relevant provisions of the LLP agreement....Further, the concepts of "rights" and "duties" connote legal enforceability...."
- The Court also found that influence which is outside the legally enforceable rights in the LLP agreement, and so incapable of qualifying as influence for the purposes of Condition B, could nonetheless dilute the significance of the influence that does qualify. Thus, the influence held by a non-member CEO of a group can render the influence given under the LLP agreement insignificant.
- The Court of Appeal has decided what it thinks Condition B means and has sent the case back to the First Tier Tribunal to apply that law to the facts of this case. We expect that BlueCrest will seek leave to appeal the decision to the Supreme Court and we would expect that the Supreme Court will agree to hear the case. This case has a long way to run.
- The decision seems to have been reached without any regard to long-established market and HMRC practice. The judge stated "I am not deterred from taking this course by the fact that the construction which I consider to be correct was not advanced by either side in either Tribunal."
- The decision seems in contradiction to HMRC guidance published since the rules were introduced in 2014 including the guidance issued alongside the draft legislation (the Revised Technical Note). By way of example, that guidance includes the following statement from HMRC: "In cases where the firm's activities consist wholly or almost wholly of regulated activities and the individual in question significantly contributes to the firm's major decisions (management, strategic or investment-related), then it is likely that HMRC would accept that this constitutes significant influence for the purpose of Condition B." Surprisingly, having referred to the Revised Technical Note in the judgment, the judge stated "As far as I can see, no assistance can be gained from any of the pre-enactment history to which we were referred about the intended purpose of the limiting words in Condition B."
The decision not only states that significant influence must be specifically sourced from the LLP agreement but (crucially) that significant influence does not look beyond the enforceable rights and duties of the members. It is that second aspect of the decision that is potentially most troubling as the first aspect could simply mean that significant influence must flow from a governance structure that is in accordance with the LLP agreement (including terms implied through conduct). That would not be particularly controversial. For example, an LLP agreement may provide for a management committee that can create sub-committees. One or more investment committee may be created under that framework. We believe a member of that investment committee can have significant influence via that route even though it is difficult to look at that influence through an enforceability lens. It is not clear how the Court of Appeal construction would apply to that situation albeit the tone of the judgment is not encouraging. Nevertheless, there is an interpretation of the judgment that is not inconsistent with significant influence occurring via governance arrangements prevalent within private capital managers.
We would advise those who are relying on Condition B in order to
avoid salaried member status not to overreact to this decision. Of
course, reviewing their LLP agreements in light of the decision is
a natural reaction but we expect more twists and turns in this saga
and still hope that sense will prevail.
A fundamental issue demonstrated by this decision is the role that
HMRC plays in making and then applying tax legislation.
Understandably, the Court of Appeal approached its decision as if
Parliament made the law with an active mind ("So, we are left
to puzzle it out for ourselves, in the light of the relevant
principles of statutory construction and the guidance in the
authorities on what is meant by the intention of Parliament")
but the reality is that the salaried member rules were driven by
HMRC both in terms of the consultations in 2013 and the draft
legislation. Alongside the draft legislation, HMRC issued
accompanying guidance (the Revised Technical Note) and taxpayers
were invited to interpret the new law in line with that guidance.
Then HMRC started to change their guidance and pursue enquiries in
contradiction to their original guidance. That all ends up in the
current situation where a judge, seemingly without any of that
context, takes a purist approach which is completely at odds with
both the original and indeed current HMRC guidance and market
practice. It is a regrettable situation which arises from allowing
HMRC too much control over the legislative process and expecting
taxpayers to rely on HMRC guidance to overcome inadequacies and
uncertainty in tax legislation.
This development on Condition B occurs at a time when the position
on Condition C (capital contribution) is also up in the air
following HMRC's change of guidance on the application of the
SMR targeted anti-avoidance rule to those who deliberately fail
Condition C.
If this Condition B decision is upheld and enforced in a way which is out of line with long-standing HMRC guidance and practice and/or HMRC do not reverse their current approach on Condition C, one solution may be for the Government to amend the legislation with effect from its introduction to align with the guidance issued alongside it.
Originally published 22 January 2025.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
