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HMRC internal manual

Business Income Manual

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

Deferred profit arrangements - ITTOIA/S850C (2), (8)

Condition X applies where it is reasonable to suppose that amounts representing the individual member’s deferred profit are included in the non-individual member’s profit share.

  • Reasonable to suppose means that you take a realistic view of the facts and use a balanced common sense approach.
  • Reasonable to suppose does not mean that it has to be certain.
  • Reasonable to suppose means you should ignore an improbable or extreme outcome.


What are “deferred profits”?

Deferred profits means any profits of the individual member that are held back for whatever reason, and are initially allocated to a non-individual member, with the result that the tax paid in that period is lower than it would have been if the profits had been allocated to the individual.

  • There is no need for the profits to be earmarked for a specific individual, deferred profits includes any profits that are held back for a group of individuals, see example 2 below.
  • There is no need for there to be any certainty that the individual will receive the profits. Deferred profit arrangements include arrangements that include the possibility that events may mean that the individual may not actually receive the profits, see example 1 below.


Alternative Investment Fund Managers

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 member.  Any such profits allocated to a non-individual member of the partnership are deferred profits for the purposes of Condition X. Guidance on this situation can be found at BIM82825.

*Example 1 *

This example looks at a deferred remuneration scheme, where a bonus is initially allocated to a corporate member.

*Kate is a member of XYZ LLP. She is awarded a bonus that is conditional upon the successful outcome of a project she has been involved in. The bonus is initially allocated to XYZ Corporate Member Ltd. *

This is a deferred profit arrangement; the fact that it is conditional upon a future event does not alter this.

The profit deferral arrangements may operate in relation to a class of members rather than a particular individual, as set out in the example below:

Example 2

Y LLP has 50 individual members and a corporate member N Ltd. The 50 individual members are the shareholders in N Ltd. Profits allocated to N Ltd are injected as capital contribution into Y LLP; they are not paid out, by dividend or otherwise to the shareholders. However Y LLP keeps a memorandum note which tracks the longer-term entitlement of each of the individual members to a respective portion of each year’s N Ltd profit allocation based on the partnership’s profit sharing arrangements in that year. When an individual member retires from the LLP, he is paid out that cumulative entitlement and he ceases to participate as a shareholder in N Ltd.

The profit share of N Ltd is attributable to each of the individual members in proportion to the entitlements tracked within the memorandum note and which will be paid out to them on retirement. The amounts represent the deferred profits of each individual which will be reallocated under the excess profits allocation rules.

If there were no separate memorandum, but the ultimate entitlement in relation to the profits allocated to N Ltd were to depend upon discussion at the time of the individual member’s retirement, then each year’s reallocation would be based on an assessment of how much of the total deferred profit allocated to N Ltd in that year is, on a just and reasonable basis, properly attributable to the individual. This would in practice mean that the total of N Ltd’s profit for each year would have to be re-allocated amongst the individuals to whom the deferred profit arrangements were relevant. No profit would remain chargeable to corporation tax on N Ltd.