Is a partner of a partnership self-employed or an employee?

On 17 January, the Court of Appeal released its ruling in the case of , providing much-needed clarity on HMRC’s application of the salaried member rules, especially the significant influence test (Condition B). This will be of particular interest to traditional professional services firms such as lawyers, accountants and architects, as well as those operating in the financial services sector in the hedge fund and private equity market.

In 2014, HMRC introduced the salaried member rules to address the ambiguity surrounding who is considered self-employed and who is an employee within LLPs. These rules set out three conditions that, if all are met, would classify a member as an employee for tax purposes and taxed under PAYE:

• Condition A: At least 80% of the member’s remuneration is fixed (disguised salary).
• Condition B: The member does not have significant influence over the LLP’s affairs.
• Condition C: The member’s capital investment in the LLP is less than 25% of their disguised salary.

The Court of Appeal’s recent ruling has upheld HMRC’s position on both Condition A and Condition B, overturning the Upper Tribunal’s previous decision on Condition B and referring the case back to the First-tier Tribunal on a point of law. Unless an appeal changes the current standing, this landmark decision narrows the definition of “significant influence” under Condition B, making it more challenging for partners to assert that they have significant influence over their LLP’s affairs – even narrower than what HMRC’s guidance currently suggests.

The judgment emphasises that the documented legally enforceable rights and duties of the member, rather than influence derived from other arrangements, should be the test. This shift could prompt courts to prioritise the legal rights of a member over the practical realities of their influence within the LLP.

Businesses operating as LLPs, particularly those in industries where fixed profit shares are common, should reassess their positions in light of this ruling. Management should initiate a thorough review of LLP governance and member agreements to ensure compliance and mitigate any risks arising from this judgment. This decision, following HMRC’s reassessment of qualifying capital for Condition C in 2024, puts more urgency on reviewing existing agreements.

BlueCrest Capital Management (UK) LLP has a 28-day window to appeal the decision, but for now, the Court of Appeal’s ruling stands as a significant win for HMRC and a critical development for LLPs across the UK.