Major Tax Developments for UK Private Credit Managers Established as LLPs

UK private credit managers established as LLPs will likely be familiar with the “salaried member” tax rules. Broadly, the effect of the rules is to tax LLP members as employees (with associated payroll tax and social security liabilities), unless members fail one or more of three conditions. Due to ongoing litigation (the Bluecrest case), controversial changes in HM Revenue & Customs’ (HMRC) guidance and significant HMRC scrutiny, the salaried member rules have been a cause of real uncertainty for some time. Two important recent developments in this area should be noted.

Bluecrest litigation

First, in January 2025, the Court of Appeal published a surprising and unhelpful decision in the Bluecrest case. The case primarily concerns Condition B, which revolves around whether LLP members have “significant influence” over the affairs of the LLP. Members who have significant influence fail Condition B and are therefore not taxable as employees.

Many asset managers have relied upon Condition B to fall outside the salaried member rules and the lower courts’ decisions in Bluecrest were very helpful in this regard. The Court of Appeal, however, has surprisingly held that significant influence is much narrower than previously thought. In particular, it decided that influence must derive from, and have its source in, the legally enforceable mutual rights and duties of the members (i.e., it must derive only from statute and/or specific contractual rights in the LLP’s governing agreement). De facto influence is not sufficient.

Further, it held that significant influence must be over the affairs of the LLP as a whole (i.e., it is effectively limited to those members who are responsible for decision making at an overall strategic level – the managing partner, management committee or similar). The case has been sent back to the First Tier Tax Tribunal, but we understand that Bluecrest will seek leave to appeal to the Supreme Court. There are also ongoing judicial review proceedings. As a result, certainty on this point is unlikely to be forthcoming in the near future.

Capital contributions

Secondly, and more favorably, we understand that HMRC has decided to reverse certain controversial changes made in February 2024 to its guidance on Condition C. Condition C concerns capital contributions made by members.

Contrary to long-standing market practice, the February 2024 changes suggested that a member would be unable to rely on Condition C if top-up contributions are made to their capital in order to continue to meet the threshold required to fail the condition (as is commonly the case where firms rely on Condition C).

No formal announcement has been made, and HMRC continues to consult on the detailed amendments to be made to the guidance. Nevertheless, we understand that a substantial reversal of HMRC’s position will be forthcoming. This is expected to revert to the previously widely understood position that additional capital contributions will not be ignored for Condition C, as long as the capital is genuine and at risk in the business.