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HMRC internal manual

Business Income Manual

Business Income Manual: Computing the amount to assess: Mixed Membership Partnerships: Excess profit allocation: overview


This part provides an overview of the excess profit allocation rules. It contains links to help you find more detailed guidance on the rules. For those that prefer, a table of contents can be found at BIM82715.

The rules apply to partnerships (including UK LLPs treated as partnerships) which are “mixed membership partnerships” that is they have a mixture of individual and non-individual partners.

The rules apply as part of the self-assessment process of working out the profit shares on which the partners are taxable. The profit shares to be shown on the partnership return are those after adjustment for the rules.

Do the rules apply?

The question is whether the rules apply on the facts in the period under review? The fact that the arrangements were put in place before the rules were announced makes no difference.

The rules apply if there is a taxable profit, and a profit share is allocated to a non-individual partner (see BIM82720) and either:

  • The profits are “deferred profits,” that is their provision to one or more individual member is deferred but they may be passed on at a later date. This is termed Condition X (see BIM82730); or
  • The amount of the profit share allocated to the non-individual partner is more than a reasonable return for its contribution to the partnership (the “appropriate notional profit”- see BIM82745) and one or more individual partners have the “power to enjoy” (see BIM82770) all or any part of the profit share allocated to the non-individual partner. This is termed Condition Y (see BIM82740).


The rules do not apply to all mixed membership partnerships. They will not apply where the individual and non-individual partners are genuinely independent, acting at arm’s length and not intending to defer profits or secure a tax advantage.

Further detail on when the rules apply can be found at BIM82725.

The rules apply where it is reasonable to suppose that the individual’s profit share is less than it would be apart from the profit deferral arrangements, or the circumstances that lead to the power to enjoy condition being met, and that, overall, less tax is paid because of the allocation of profits to the non-individual.

What do the rules achieve?

Under normal partnership rules, each partner is normally taxed on their share of the profits calculated under the profit sharing arrangements that apply during the period.

Under the mixed membership rules, the partners’ profit shares are adjusted for tax purposes so that the individual is taxed on the profits that:

  • They may have reasonably been expected to receive if there were no deferral arrangements; or
  • They may reasonably been expected to receive had they not had the ability to enjoy the profits allocated to the non-individual member; and
  • The non-individual is taxed on a smaller share. This reflects the additional amount on which the individual is taxed.


In cases where the rules apply because the individual has the “power to enjoy” then the maximum additional profit that the individual can be taxed on is the difference between the appropriate notional profit for the non-individual and the profit allocated to that non-individual (the non-individual’s “excess profit”) (see BIM82805).

For this purpose (and the purpose of reallocating profits), income tax rules are applied to the calculation of the non-individual’s excess profit even if it is a company that pays corporation tax.

The profit shares of a number of individuals may be allocated to the same non-individual member. In this case, the excess profit is reallocated amongst the individual partners on a just and reasonable basis (see BIM82805).

As part of EU-wide strategy for investor protection, members of partnerships that are Alternative Investment Fund Managers may have their access to their profit shares deferred for a period of time. The partnership may choose to allocate these deferred profits to a non-individual partner.

Guidance on how this legislation interacts with the legislation on AIFMs can be found at BIM82825.

The legislation contains anti-avoidance provisions to prevent avoidance by using intermediary structures (see BIM82810). (For example, if individual members withdraw from the partnership but continue to provide services for the partnership through a corporate member that they control).

Guidance on specific issues can be found at BIM82850 onwards.

Guidance on the position when an existing business carried on by someone else is transferred to an LLP can be found at BIM82855.

Guidance on the position where a third party takes over the LLP, but the business continues in the LLP can be found at BIM82870.

Guidance on the position when an external party or parties injects capital into the partnership, such as a Private Equity firm, can be found at BIM82880.

Guidance on the position when the UK partnership is seeking to raise finance by issuing shares in a corporate partner to be traded on a stock exchange can be found at BIM82890.

Guidance on the position where an LLP has a structure that approximates to a share scheme can be found at BIM82900.

Guidance on the position when the UK partnership is a member of a wider International grouping can be found at BIM82910.

LLPs may be part of wider international structures. Guidance on how the excess profit allocation rules apply to these structures can be found at BIM82910.

Guidance on how the rules apply in periods that straddle 6 April 2014, the “commencement provisions”, can be found at BIM82945.