Salaried member rules: members with significant influence

UPDATE: On 9 May 2025, the Supreme Court granted BlueCrest permission to appeal. We understand that permission has been granted to appeal on submissions on both Conditions A and B.

The Court of Appeal has held that the FTT and UT incorrectly interpreted Condition B in the salaried members’ rules and has referred the case back to the FTT on this issue: BlueCrest Capital Management (UK) LLP v HMRC [2025] EWCA 23. The Court has held that on a true construction of Condition B, it is only those enforceable rights and duties that arise from the LLP agreement, statute or potentially elsewhere that may be taken into account in determining whether a member has significant influence over the affairs of the LLP. In taking into account the de facto influence wielded by members with capital allocations of $100m or more, the FTT and UT had made an error of law and the correct procedure was now to refer the matter back to the FTT for a decision based on the correct interpretation of the law.

The fact that both parties had proceeded before the FTT and UT on the basis that de facto influence could qualify as significant influence for these purposes did not prevent the Court of Appeal applying its own (and, in its view, correct) interpretation of the law. Indeed, the Court had a duty to interpret the law correctly notwithstanding the agreed position adopted by the parties.

The Court also rejected the cross-appeal by BlueCrest that the remuneration in the form of discretionary allocations was not variable by reference to the profits or losses of the partnership simply on the basis that it would not be paid if the partnership did not have sufficient profits as a whole.

This decision is highly significant in the context of the salaried member rules. Current HMRC guidance is not overtly prescriptive (noting that Condition B refers to "those individuals who... merely work in the business rather than carry it on" and suggesting that it is a multifactorial test), though in practice the guidance and examples adopted by HMRC largely seek to focus on and highlight the management aspects of an LLP. The decision of the Court of Appeal will, however, require affected taxpayers to focus very clearly on the rights and duties which arise from the LLP agreement or other sources that give rise to enforceable rights and duties, rather than more generally in the running of the LLP’s business. Any wider influence arising from outside those “rights and duties” will, in principle, not be relevant in considering the application of Condition B to a particular member, although may be taken into account in determining whether that member’s influence is significant or not. As a result, having a significant influence on the core operations of the business (in this case investment management) will not be sufficient in itself to take relevant members outside the scope of the salaried member rules.

Background

The salaried member rules (contained in ITTOIA 2005 sections 863A to 863G) were introduced in 2014 and designed to remove the presumption of self-employment for some members of LLPs and so tackle the disguising of employment relationships through LLPs. Prior to their introduction, there had been extensive discussions regarding the application of the proposed rules in practice, including in the context of asset management businesses, some of which was ultimately reflected in HMRC's published guidance and which has been periodically updated since then.

The rules apply where HMRC determines that the nature of the relationship between a member and the LLP with which they are concerned meets each of three conditions.

Condition A is met if at the relevant time it is reasonable to expect that at least 80% of the amount paid by an LLP to an individual member is disguised salary. That includes amounts which are variable but vary without reference to the overall amount of the profits or losses of the LLP, or are not, in practice, affected by the overall amount of those profits and losses.

Condition B is met if the mutual rights and duties of the members of the LLP do not give a member significant influence over the affairs of the LLP.

Condition C (which was not an issue in this appeal) relates to the size of an individual member's capital contribution to the LLP.

Somewhat counter-intutively, failure to meet one or more of such conditions will mean that the relevant member continues to be taxed on the basis of self-employment, rather than employment.

HMRC determined that the salaried member rules applied to certain members of BlueCrest in respect of a period covering a number of years. In particular, HMRC sought to apply the rules to two broad categories of member:

• discretionary traders or portfolio managers, including desk heads (portfolio managers). Portfolio managers were responsible for managing an investment portfolio as part of the investment management services provided by the appellant to BlueCrest group entities. Portfolio managers were allocated an amount of capital and had discretion as to how to invest that capital allocation; and
• infrastructure members and other front office members (non-portfolio managers). These were, broadly, the members who were responsible for providing the support or back-office services, such as technology, facilities, legal and compliance or very experienced researchers or technologists responsible for managing teams such as quant research teams and computer modellers.

Typically, such members received allocations made up of three elements:

• Priority distributions: individual members receive a fixed amount each month. The maximum priority distribution for each individual member was set out in a letter of allocation. For portfolio managers, this was generally £150,000 per year and was paid by way of monthly drawings.
• Discretionary allocations determined at the discretion of the Board. The discretionary allocations could not exceed the total profits available for that purpose in a given year.
• Income point allocations: any remaining profits after discretionary allocations were allocated between members by reference to the "income points" held by each member.

It was accepted that the priority distributions fell within the salaried member rules as disguised salary and the income points allocations fell outside that definition. In HMRC's determination, however, the discretionary allocations made at the discretion of the Board also fell to be treated as disguised salary. As regards significant influence, HMRC was not persuaded that the relevant members generally exercised the necessary degree of influence in order to fail Condition B, given the nature of their role and the overall position of the LLP in the wider BlueCrest group.

BlueCrest appealed these determinations to the FTT arguing that neither Condition A nor Condition B were met. As regards Condition A, BlueCrest argued that the allocations did depend on the profitability of the LLP as a whole. As regards Condition B, BlueCrest argued that (a) all of the non-portfolio managers and (b) each of the portfolio managers with capital allocations of $100 million or more exerted "significant influence" over the affairs of BlueCrest.

Decisions of the FTT and UT

On Condition B, the FTT held that members of an LLP that managed significant portfolios of investments and/or who were desk heads did not fall within the salaried member rules by virtue of failing that condition. The FTT accepted the appellant's submission that "significant influence" for the purposes of these rules included significant financial influence and was not limited to management influence, as HMRC had asserted. However, BlueCrest had not shown that non-portfolio members exerted significant influence, either individually or as a whole.

On Condition A, the FTT held that remuneration would not be variable within the meaning of Condition A where the link between the remuneration and the profits of the partnership was simply that the remuneration would not be paid, or would be reduced, in circumstances where the partnership had insufficient profits to pay them. That was the case even if that provision was a term of the contract. Such an indirect link was insufficient.

The UT essentially held that the FTT had been entitled to reach the conclusions that it had around “significant influence” on the facts and rejected HMRC’s arguments that there had been any error of law in the FTT’s approach. It also endorsed the FTT’s approach to Condition A.

(For a full review of the decisions of the FTT and UT see the appendix below.)

HMRC appealed the decision concerning portfolio managers on Condition B and BlueCrest cross-appealed the application of Condition B with regard to the population of non-portfolio managers/desk head members should HMRC win its appeal. BlueCrest also contended that the decision of the FTT and UT with regard to Condition A was incorrect.

Decision of the Court of Appeal

HMRC were given leave to appeal in this case by Falk LJ on the basis that it was arguable that the Tribunals had made an error of law. In particular, “Condition B needs to be interpreted in context, which includes the other conditions” and “the test is not simply “significant influence of the affairs” without more; rather such influence must be determined with reference to the “mutual rights and duties” of members, which raises the question as to how that reference affects the correct interpretation of “significant influence”. The leading judgment in the Court of Appeal is given by Sir Launcelot Henderson. In essence, the Court agreed with this questioning of the approach in the Tribunals to the interpretation of “significant influence” noting that the reference in the legislation to the “mutual rights and duties of members” was not “mere surplusage” and that, unfortunately, this issue went virtually by default in the Tribunals.

The Court noted that the language of “mutual rights and duties” mirrors the language used in LLPA 2000 s.5 which deals with the relationship between members and stresses that these are governed by the agreement between the members or the LLP and the members. Therefore, viewed in its wider statutory context, “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 statutory and contractual framework which governs the operation of the LLP”. In this case, the LLP agreement contained an entire agreement clause and excluded the default provisions in the LLP Regulations 2001, and as such this must be the main focus of the enquiry. “Conversely, influence over the affairs of the LLP which lacks any identifiable contractual and/or statutory source in the specified rights and duties is excluded from consideration of the kind of influence which counts for the purposes of Condition B, although it may remain highly material in deciding whether the influence that does qualify (“qualifying influence”) is “significant” when assessed in the light of any “non-qualifying influence” which may be found to exist on the facts of the given case.”

In terms of what influence may be significant, the Court noted that “the affairs of the partnership” in this context seems to connote the affairs of the partnership generally, viewed as a whole and in the wider context of the group. It is broader than the business of the LLP. “More generally, a focus on decision-making at a strategic level, rather than on how individual members perform their duties in conducting the Business, seems to me to accord better with the basic purpose of Condition B”.

The FTT had held that significant influence for the purposes of Condition B was not limited to managerial influence and could include influence over one or more aspects of the LLP’s affairs. On this basis, the FTT accepted that portfolio managers with capital allocations in excess of $100m had significant financial influence over the affairs of the LLP and would have a status equivalent to a partner in a traditional partnership. It was common ground before the FTT (and UT) that the Tribunals were entitled to consider the actual position and the inquiry was not restricted to the terms of the LLP agreement. HMRC had agreed that de facto influence was capable of qualifying as significant influence.

On the basis of the Court of Appeal’s interpretation of the wording of Condition B, it was clear that the FTT (and UT) had made an error of law. Mere de facto influence is not capable of being significant influence for the purposes of Condition B. The influence must derive from the mutual rights and duties set out in the LLP agreement or statutory provisions. What of the fact that HMRC had accepted this position? This did not deter the Court from applying the correct construction. “On a question of statutory construction, it is our duty to decide for ourselves what the legislation means, and we cannot be bound by any agreement between the parties.”

Procedural unfairness?

BlueCrest also argued that it would be procedurally unfair to allow HMRC to argue this new point of law before the Court of Appeal. That argument was rejected on the facts. Firstly, the burden had always been on the taxpayer to displace the assessment. Furthermore, there is a public interest in taxpayers paying the correct amount of tax, such that fresh arguments may be advanced by either side, or by the tribunal on its own motion, subject to the requirements of fairness. In this case, the Court of Appeal considered there was no unfairness in allowing the point to proceed. In particular, the Court pointed out that the correct interpretation identified by the Court was one that was narrower in scope and looks only at enforceable rights and duties of the members in identifying influence. “It is therefore hard to understand how BlueCrest could have been prejudiced when collecting its evidence in support of its positive case that the wider construction embodied in HMRC’s primary argument was correct.”

Conclusion

The Court concluded that the Tribunals had erred in law in accepting the wider construction of Condition B reflected in HMRC’s published guidance and which was common ground between the parties. In particular, the FTT had approached the all important examination and evaluation of the evidence on the mistaken basis that the necessary qualifying influence on the affairs of the LLP could be found not only in the LLP Agreement and any other sources of enforceable mutual rights and duties, but also in any de facto arrangements which were in place from time to time, however informal they may have been, and whether or not they were legally enforceable.

In those circumstances, it was necessary to refer the matter back to the FTT so that it can consider the evidence in the light of the correct test. In doing so, the Court made a number of observations, including that the Court was not at the time of giving its judgment persuaded that BlueCrest should be given an opportunity to adduce further evidence on the basis that BlueCrest should have adduced all evidence on which it might rely at the original hearing.

Condition A

Finally, and briefly, the Court rejected BlueCrest’s appeal on the application of Condition A. The FTT and UT had been right to hold that where the overall amount of profit merely functions as a cap on remuneration which is variable without reference to overall profits, such remuneration is a form of disguised salary.

Comment

The decision of the Court of Appeal is perhaps both surprising and uncontentious at the same time. On the one hand, HMRC had accepted that significant influence could arise from an overall assessment of the relationships between the members themselves and the members and the LLP (albeit that HMRC had argued that that influence must be over the LLP’s affairs as a whole and could not simply arise from financial and operational influence). On the other hand, the Court of Appeal’s interpretation is essentially merely a close reading of the actual words of the legislation, read in context, which specifically refer to the “”mutual rights and duties of the members”. That reading is, however, significantly narrower than the interpretation adopted in practice and in HMRC’s Partnership Manual. It remains to be seen whether BlueCrest will appeal the decision to the Supreme Court.

In the meantime, all LLPs should consider their position, both historically and going forward. The decision of the Court of Appeal calls into question the current status quo, and may indicate that far fewer members may fall outside these rules than HMRC may previously have accepted to be the case. Affected businesses should consider whether to review their current LLP arrangements and what actions they may take as a result of this decision.

Finally, it is worth noting that, whilst the Court of Appeal did not consider the application of Condition C or the TAAR in section 863G, were the same approach to be adopted by a court considering either of those areas, one would expect that court, informed by this decision, to focus on the clear statutory language – as the Court of Appeal states at paragraph 108, “The incantation of a purposive interpretation is of no avail, if the relevant words construed in their context, and with due regard to the statutory purpose, admit of only one meaning and do not produce absurdity”.

Appendix

Decision of the FTT

The decision of the FTT is heavily influenced by the purposive approach adopted by the tribunal to the salaried member rules. The tribunal noted that these rules are intended to apply to those members of LLPs who are more like employees than partners in a traditional partnership. They are designed to ensure that LLP members who are, in effect, providing services on terms similar to employment are treated as employees for tax and social security purposes. The approach of the tribunal to its analysis of Conditions A and B is heavily influenced by this overarching principle.

In addition, as a general point, the tribunal accepted that the burden of proof for showing the either Condition A or Condition B did not apply rests with the taxpayer, the standard of proof being the balance of probabilities.

Condition A

Condition A is a look forward test and requires consideration at the beginning of the relevant period of whether it is reasonable to expect that at least 80% of an individual member's total remuneration is either fixed, or is variable but is capable of variation without reference to the overall profits or losses of the appellant, or is not in practice affected by the overall profits or losses.

In this case, portfolio managers were paid discretionary allocations calculated, in broad terms, by reference to the profit (if any) on their individual portfolio. Non-portfolio managers had no portfolios to manage, and so their discretionary allocations were not calculated using any individual profit and loss account. The process of calculating their variable remuneration was a "judgemental process" rather than "formula-driven".

BlueCrest argued essentially that if there were no profits, the members would receive no remuneration. And if there was less profit than anticipated, the members could not be paid the amounts of their discretionary allocations. And thus their bonuses were capable of variation by reference to the LLP's profits.

The tribunal rejected this argument. In the context of Condition A, the tribunal formed the view that it is necessary for there to be a link between the LLP's profits, on the one hand, and the basis of the calculation of the variable remuneration, on the other. "It is self-evident that if there are no, or fewer, profits to be distributed, then individual members will get less remuneration. But that of itself is insufficient to make the remuneration variable."

In this case it was clear that the discretionary allocations made to the relevant portfolio managers varied, but in the tribunal's view, these varied by reference to their own personal performance. And although the initial entitlement calculated might then abate when the profits of the LLP were finally determined, that did not indicate that the allocations were, essentially, variable and computed by reference to, that overall profit. They were computed by reference to individual performance.

The FTT noted that if the LLP did better than expected, portfolio managers did not share in the uplift by reference to their discretionary allocations. Any such uplift would be extracted by virtue of the income point allocations. Comparing this to a traditional partnership, the FTT noted that the portfolio managers were not really concerned whether the partnership had a "good year", provided there were sufficient profits to cover their individual allocations. This was different from the traditional partnership structure where partners generally benefit when a partnership has a good year. Bearing in mind that the salaried members rules are deeming provisions which are intended to distinguish between those members who are more like employees, and those who are more like partners in a traditional partnership, the FTT decided that the discretionary allocations were more akin to an employee's performance related bonus than to a partner in a traditional firm sharing in the overall profits of the partnership.

The FTT was bolstered in this conclusion by the fact that there was no evidence adduced that, as a matter of fact, when the Board came to consider the final discretionary allocations, it took into account the profits of the LLP when considering the individual allocations of the portfolio managers or the non-portfolio managers. The FTT did, though, observe that (in line with the position in HMRC guidance) it was not required for the level of discretionary allocations to increase or decrease year to year in a manner that tracked the overall profits of the LLP.

Whilst strictly unnecessary to do so, the FTT also considered the application of the targeted anti-avoidance rule in section 863G. This provides that when considering the application of the three Conditions, any arrangements which have as their main or one of their main purposes to secure that such a member is treated as not being an employee, are to be disregarded. In this case, the FTT would have agreed with HMRC that the main purpose or one of the main purposes of resolutions put in place at the time the salaried member rules were introduced to ensure that discretionary allocations were compared against the total profits of the LLP was to secure that members that might otherwise be treated as employees, should not be so treated. Their purpose or main purpose was to put beyond doubt something which was already beyond doubt, namely that the LLP could not distribute more to its members that its accounting profit. But that purpose was to secure that the relevant members were not to be treated as employees.

Condition B

As regards Condition B, BlueCrest argued that when considering significant influence, one can consider not just managerial influence but also financial influence, and that influence need not be over all of the affairs of the LLP but it can apply where a member has significant influence over one aspect of those affairs. On the facts of this appeal, BlueCrest contended that all portfolio managers with capital allocations of $100m or more had autonomous influence over the key financial purpose of the LLP. In the case of non-portfolio members, they exercised significant influence over the LLP's affairs because they ran departments which were essential to supporting the key purpose of the LLP in delivering support services to the rest of the group.

HMRC in contrast argued that significant influence is limited to significant managerial influence, and a high earner (or significant biller in the context of a law firm) only wields significant influence if that financial contribution is reflected in "managerial clout". Furthermore, the influence must be over the overall affairs of the partnership and not just to one or more aspects of them.

The FTT rejected HMRC's approach. In particular, taking the characteristics of a traditional partnership, there was no justification in limiting significant influence to managerial influence. The role of a partner in a traditional partnership is to go out and find work, supervise others to undertake it, and to do the work themselves. These activities are not limited to making management decisions, but to contributing to the success of the partnership through the management of the work process. Since the purpose of the salaried members rules is to distinguish between activities of an individual who is effectively an employee but operating under the guise of a member of an LLP, on the one hand, and the activities of a partner in a traditional partnership, on the other, the FTT considered that there was no justification for restricting significant influence to solely managerial influence and this conclusion was coloured by the clear financial and other influence demonstrated by a partner in a traditional firm. Significant influence could also extend to operational decisions which significantly influence the affairs of the LLP. Operational decisions, and operational influence, at the level of the LLP fell squarely within the ambit of Condition B according to the FTT.

In addition, the FTT also agreed with BlueCrest that, contrary to HMRC's position, the expression "affairs of the partnership" used in the legislation is not restricted to the affairs of the partnership generally but can be over an aspect of the affairs of the LLP, having regard to the LLP's business.

As regards the activities of the portfolio managers, the FTT accepted that they took key investment decisions on a daily basis, and their main if not sole purpose was to make money for the LLP so that the LLP, in turn, could make money in its capacity as an investment manager. This was the core activity of the LLP. They could therefore, as a class, and individually, potentially exercise influence over the affairs of the LLP by dint of this investment activity. Furthermore, the evidence showed that, on an operational basis, they were involved in the sort of activities which a partner in a traditional partnership would have undertaken; namely: hiring and firing; identifying and then exploiting new business opportunities; bringing on junior members of staff; and managing counterparty relationships. The activities undertaken by the portfolio managers were directly analogous to those activities carried out by partners in a traditional partnership.

The FTT accepted, therefore, that once a portfolio manager was made up to be a member, they would be carrying out the activities of the traditional partner. The evidence was that the capital allocation of $100m was a level of capital allocation commensurate with the status of a member (and by analogy a partner in a traditional partnership) in the sense that portfolio managers who had the qualities to manage a capital allocation of $100m had demonstrated the qualities of a partner in a traditional partnership.

Accordingly, the FTT held that each individual portfolio manager with a capital allocation of $100m did have significant influence over the affairs of the partnership, both from a quantitative and qualitative perspective. Similarly, "desk heads" who oversaw the activities of other portfolio managers were also considered to exercise significant influence.

However, the FTT concluded that the appellant had not shown that the non-portfolio members exerted significant influence, either individually or as a whole. The position of non-portfolio members was very different to portfolio members where the financial contribution of the latter group could be clearly identified and where there was considerable evidence as to the operational and managerial activities undertaken by them. In contrast, the activities undertaken by the non-portfolio members were not (in the experience of the tribunal judge and based on the evidence before him) ones which would have necessarily been undertaken by partners in a traditional partnership. They could equally (and given the specialist nature of the operational activities undertaken, for example risk, HR, finance, tax etc) be undertaken by employees who specialised in those areas. In contrast to the portfolio managers, the non-portfolio managers only contributed indirectly to the operational activities of the LLP, and whilst they assisted the portfolio managers to exercise their significant influence both collectively and individually, they did not so directly. As such, any such "influence" was exercised at second hand, and, in any event, the FTT did not consider it to be significant. Referring back to the distinction between the role played by a partner in a traditional partnership, and the role played by an employee in that partnership, the FTT concluded that the role played by the non-portfolio members was more akin to the role of an employee and not to the role of a traditional partner.

Decision of the Upper Tribunal

The UT rejected HMRC's appeal against the decision of the FTT that individual members of an LLP who as portfolio managers managed significant portfolios of investments, or who were appointed as desk heads, did not fall within the salaried member rules: : HMRC v BlueCrest Capital Management (UK) LLP v HMRC [2023] UKUT 232. The UT considered that the FTT was perfectly entitled to conclude that portfolio managers with capital allocations of $100m or more and desk heads had significant influence over the affairs of the partnership as a result of the activities they carried out within the LLP.

However, the UT also rejected the cross-appeal by BlueCrest that the remuneration in the form of discretionary allocations was not variable by reference to the profits or losses of the partnership simply on the basis that it would not be paid if the partnership did not have sufficient profits as a whole.

Condition B

HMRC challenged the FTT decision on Condition B on a wide variety of grounds, including that the FTT erred in its construction of "affairs of the partnership", "influence", "significant" and more generally failed to consider the legal distinction between traditional partners and employees.

HMRC argued that the "affairs" of the partnership for the purposes of Condition B must be construed by reference to the business as a whole and not one or more aspects of the business. The UT rejected this argument. That would be to write additional words into the statute. In any event, requiring the reference to be one to the entirety of the affairs of the partnership would be a highly unrealistic approach. As a matter of construction, looking at the purpose of the legislation, the bar would be set too high if significant influence in Condition B was read only to mean significant influence over the entirety of the affairs of the partnership.

HMRC submitted that "influence" required by the legislation meant influence over the management of the partnership business and not financial influence. A person with "influence" can shape the business, not merely contribute to it. The UT again rejected this argument as an attempt to read additional words into the statute. "The inquiry is a fact sensitive one. Responsibility for operational activities may give rise to significant influence. Financial performance and/or financial responsibility may give rise to significant influence. Managerial responsibility may give rise to significant influence. Again, this all depends upon the facts of the particular case."

HMRC also argued that the FTT had erred in its construction of "significant" in conflating influence and significant influence and only excluding influence that was insignificant. The UT rejected HMRC's attempt to "put a gloss" on the expression "significant influence". Whilst it was clear that the word "significant" had to be given effect (such that something more than just influence was required), the UT rejected the argument that the FTT had made any error. Reading the judgment of the FTT as a whole, it was clear that it had not misdirected itself and had considered that the portfolio managers demonstrated "managerial clout" that amounted to significant influence. The UT also rejected HMRC's argument that any significant influence must ultimately derive from the LLP Agreement. However, it was accepted before the FTT and the UT that the actual position must be considered and any de facto influence was capable of qualifying as significant influence. In any event, the FTT had considered the LLP Agreement as well as what happened on the ground in terms of who exercised significant influence.

HMRC also criticised the FTT for applying the analogy with a traditional professional services firm and in particular referring to the role of a partner to "find, mind and grind". HMRC argued that the FTT had failed to adequately consider the distinction between an employee and a partner, by focussing on what a partner does rather than analysing the nature of the relationship between partners as a matter of law. The UT rejected that argument. The FTT had been correct to consider the question of significant influence by considering what the members of BlueCrest did within the partnership. The submission that, in doing so, the FTT lost sight of the difference between the role of an employee and the role of a traditional partner was both wrong and misconceived. The "find, mind and grind" was a useful tool in applying the wording of Condition B, but ultimately the FTT had simply applied the wording of Condition B and did not apply a test of "find, mind and grind". In considering the question of significant influence, and as part of the analysis of that question, the FTT found it helpful to look at the role of partners in a traditional partnership and, in particular, their "find, mind and grind" role as it was entitled to do.

HMRC argued that the FTT was wrong to apply a threshold of $100m in capital allocation to the determination of whether significant influence had been demonstrated. The UT, however, noted that the FTT did not in fact simply rely on the financial impact or threshold. The FTT decided that the portfolio managers exercised significant influence for all the reasons set out in the decision. Essentially, the FTT found that the activities carried out by portfolio managers with a capital allocation of $100m or more did mean that they exercised significant influence. Indeed, in the case of desk heads the FTT found that they exercised significant influence without making express reference to a specific level of capital allocation. So far as the FTT did rely, as part of its reasoning, on capital allocation, this was a matter for the FTT, which heard and read all of the evidence. In any event, to treat the FTT's decision as depending on a demarcation line of $100m misrepresented the FTT's reasoning which was based on all the findings as to the activities of portfolio managers. In the case of those portfolio managers with capital allocations of $100m or more, the FTT was satisfied that their activities constituted significant influence upon the affairs of the partnership. Accordingly, the question of why being on one side of the line rather than the other should demarcate significant influence was a false question. The actual reasons why the FTT thought that portfolio managers with capital allocations of $100m or more did exercise significant influence were set out in full in the FTT decision and did not depend simply on a crude dividing line.

More generally, the UT criticised HMRC for "island hopping" in its approach to the decision of the FTT judgment, by referring the UT to limited extracts and failing to consider the FTT judgment as a whole.

Condition A

In relation to Condition A, BlueCrest argued that the FTT set the bar too high in terms of the link required between the remuneration paid to each member and the profits of the partnership.

The UT noted that, taking the question in the context of the circumstances of this case (rather than in the abstract), the only contractual link (in Clause 10.8 of the relevant LLP agreement) between discretionary allocations and the profits or losses of the partnership was the ability of the partnership to limit discretionary allocations by clawing back amounts where losses were incurred by the partnership. This link was in effect a practical link. Discretionary allocations, once calculated, could only be paid to the extent that there were profits out of which they were paid. This link might also be said to be a contractual link, given the terms of Clause 10.8, but this contractual link did no more than reflect the practical link.

The UT agreed with the FTT that the wording of Condition A is not wide enough to encompass an indirect relationship between profit calculation and profits such as this. What the legislation is seeking to do is to isolate payments of the kind one would find in a traditional partnership, where the partners share in profits and losses. The partners' remuneration is thus tied to whatever amount of profits is realised, or whatever amount of losses is incurred. Even taking into account the question whether the remuneration is "in practice" affected by the profits, the FTT found that the allocations were set without reference to the overall profits and losses. The question of whether there was going to be sufficient profits to pay the discretionary allocations, once set, was a separate question and not one affecting the amount of the allocations.