haysmacintyre: Challenges from the tax man for Limited Liability Partnerships

by | Oct 26, 2022

Share this article

By Nick Bustin, Director and Dinesh Pancholi, Senior Manager at award winning firm of Chartered Accountants and Tax Advisers, haysmacintyre

Earlier this year, the First Tier Tribunal (FTT) judgment in BlueCrest Capital Management (UK) LLP v HMRC was released, drawing attention to a growing concern that some firms may be misusing their Limited Liability Partnership (LLP) status. With £55m additional liabilities at stake, the FTT ruling on BlueCrest is prompting businesses to revisit their paperwork to ensure they are compliant with rules for LLPs. 

It should be noted that FTT decisions are not binding but an appeal for this case will be heard by the Upper Tier Tribunal (UTT), although no date has been set for the hearing.


In 2000, LLPs were introduced as a way for firms to have both a limited liability status for the members and a flexible structure to operate within. LLPs became popular with accountants, lawyers, independent financial advisers (IFA) and other owner-managed professional services firms, increasing the emphasis on the classification of partners as self-employed. HMRC became concerned that certain individual members had minimal input in the daily running of the LLP, rendering them closer to employees (disguised employees), thereby avoiding Class 1 National Insurance (NI). As a result of this, in April 2014, the Salaried Members Rules (SMR) were introduced.

So, what does this mean for IFAs who set up as LLPs, and how can they ensure full compliance with the rules?

Expect more compliance checks


Although HMRC has been progressing with reviews to enforce the legislation via nudge letters, issuing notices of enquiry, and checking partnership tax returns, the BlueCrest case will no doubt see more HMRC compliance activity.

The stakes of the BlueCrest’s UTT decision are very high, with £55 million of employer’s NI at stake. Because of this, the outcome will likely be significant for all LLPs, especially those IFA LLPs who are dependent on their members failing the set conditions. As a result of this, it is paramount that all IFAs who exist as LLPs should revisit their policies to ensure that all members are operating in line with the rules.

Identifying ‘disguised employees’


Implemented by HMRC in April 2014, SMRs were introduced to give firms operating as LLPs more guidance on how their members should be taxed. This aims to ensure that only ‘proper’ LLP members benefit from the corresponding tax treatment.

Under the rules, an LLP member is treated as an employee for tax purposes if all of the following conditions are met:

  1. If at the relevant time it is reasonable to expect that at least 80% of the total amount payable by the LLP for the individual’s services in the individual’s capacity as a member of the LLP will be ‘Disguised Salary’. This includes payments which are either fixed, variable but without reference to the overall profit or loss or is not in practice affected by the overall amount of profits or losses of the LLP
  2. The mutual rights and duties of the individual does not have significant influence over the affairs of the LLP
  3. The individual’s capital contribution is less than 25% of the amount of the disguised salary it is reasonable to expect the member to receive

Next steps for LLPs


Some LLPs are already on the receiving end of SMR compliance checks from HMRC and with BlueCrest, and this activity is set to increase. Compliance status can change over time, so firms who previously adhered to rules may now find themselves not compliant, making regular reviews paramount. Firms should check over and update policies on an ongoing basis to ensure they remain compliant in the long term.

LLPs should consider their past, present and future positions as soon as they receive adverse communication from HMRC. Records of bonuses and performance shares should be reviewed, ensuring each varies with the overall profit and losses of the LLP, as this will ensure they are not paying a ‘Disguised Salary’.

In light of BlueCrest, whether they have been contacted by HMRC or not, all LLPs should review their arrangements and structure as a matter of urgency. LLPs must ensure they can prove their members do not meet any of the ‘Disguised Employee’ criteria.


Regular reviews of the conditions should be scheduled to ensure internal changes do not affect LLP qualifying status. These check-ins may be tied to milestones such as recruitment, new teams, promotion, retirement, business lines and the end of each year.

LLPs hold benefits for many, but firms must stay diligent, conducting honest, regular reviews to ensure they remain compliant and avoid receiving a nudge letter or further action from HMRC.

Share this article

Related articles

Trending articles

IFA Talk logo

IFA Talk is our flagship podcast, designed to fit perfectly into your busy life, bringing the latest insight, analysis, news and interviews to you, wherever you are.

IFA Talk Podcast - listen to the latest episode