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Mixing it up - Profit allocations to corporate partners

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16 October 2014

Following Royal Assent of the Finance Act 2014, new rules regarding the profit allocations of mixed partnerships have been introduced with effect from 6 April 2014.  The aim of this legislation being to prevent “unfair” allocations of profits in order to avoid tax.

Most practices will have put into place the required measures to avoid falling foul of the new rules, which took effect from 6 April 2014.  For others, what follows should help to put those measures in place.


A mixed partnership is any partnership (including LLPs) which have both individuals and non-individuals (e.g. companies) as members.

Following consultation after the 2013 Budget, draft legislation and guidance, and amended legislation and yet more guidance, the rules are now set in stone (or statute at least) for profit allocations to non-individual members!

Effect of the rules

The perceived abuse by HMRC is where profits are allocated to companies on a non-commercial basis to take advantage of lower rates of corporation tax and reduce tax liabilities overall.  HMRC also identified abuse through the allocation of losses to secure a tax advantage.

The new rules apply such that where a non-individual partner (typically a company) receives a profit share that exceeds a notional amount, and where one or more individual partners have the power to enjoy that profit share (typically through shareholdings in the company), the excess profit share will be reallocated to the individual partner(s) and taxed on them instead of the non-individual partner.

The notional amount is the aggregate of:
  • a notional return on the capital the company has invested in the partnership, calculated on a commercial basis, and
  • notional consideration for services provided by the company, and only by the company, to the partnership, again calculated on a commercial basis.

The notional return on capital is calculated as a commercial rate of interest payable on the partner’s capital contribution to the partnership.  The capital contribution is the amount of money or other property that the partner has contributed to the permanent endowment of the partnership.

The interest rate to be used in this calculation will reflect the level of risk involved, and HMRC expect the rate paid to third party lenders (where applicable) to be a benchmark.

The notional consideration for services is the arm’s length value of those services, and in most cases HMRC expect that value to be cost plus a modest mark-up.  It is important to note that any services provided by the non-individual partner that involve any other partners are ignored, and no value is placed on those services.  In addition, any payment actually made for the services, such as a service fee, is deducted in calculating the notional consideration.

Where a partnership has an accounting period straddling 6 April 2014, a separate accounting period is deemed to start on 6 April 2014 and end on the normal accounting date.  The new rules then apply only to this deemed period, which means that any arrangements in place prior to 6 April 2014 should not be caught.

Anti-forestalling measures were introduced with effect from 5 December 2013 to stop firms side-stepping the new rules.  The measure was simple but effective: any partner who leaves a partnership on or after 5 December 2013 in order to avoid the new rules will be deemed to remain as a partner and liable to tax on any reallocation of profit.  Care, therefore, needs to be taken when changing the membership of a partnership where non-individuals are involved to avoid the new rules applying inadvertently.


For accounting periods straddling 6 April 2014 it is important for profit allocations made before that date to be well documented and evidenced, to avoid any suggestion that the profit allocation is subject to the new rules.

As stated at the beginning, given the implementation date of 6 April 2014 it is envisaged that most practices have the necessary measures in place to deal with the new rules, and this article will serve as a refresher.  However, if you have any questions about the change in rules and how they may apply to your partnership, please get in touch as we are well placed to assist you.