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HMRC internal manual

Business Income Manual

Business Income Manual: Computing the amount to assess: Mixed Membership Partnerships: Excess profit allocation: The appropriate notional return on capital

ITTOIA/S850C (11)-(12)

The appropriate notional return on capital is the rate which in all the circumstances in reasonably comparable to a commercial rate of interest on the non-individual’s contribution to the firm.

Capital contributed:

The amount of capital contribution is based on the amount that the non-individual member has invested as capital at that time.

The capital is the amount of money or other property that all the members have contributed, to the permanent endowment of the firm.

If the member has contributed an asset, rather than money, then the capital contribution is the market value at the time of transfer.

Example 1:

C Ltd transferred a property to the LLP. It had originally cost £100,000, but the market value at the time of transfer was £250,000. The capital account of C Ltd was credited with £100,000, the historic cost rather than the market value. The property is currently worth £500,000

The capital contributed was the market value at the date that it was contributed, £250,000. 

Capital is at risk

The capital contributed does not include sums that the member is entitled to withdraw, or sums that they do not really have at risk, because there are arrangements under which they will be reimbursed.

Current Account is not capital

In addition to their capital, a member is likely to have what is sometimes called a current account. This account reflects the member’s day-to-day balance with the firm reflecting things such as their entitlement to a profit share, tax account and drawings. The current account balance is not capital contributed.

Undrawn Profits are not capital

An undrawn profit share is not capital, but the members can agree to convert it into capital just as they can agree to pay a further sum in as capital.

Rate of Interest

The legislation does not set a specific rate. The rate will vary as the appropriate commercial rate will vary from case to case and from time to time:

  • The commercial rate will reflect the level of risk involved.
  • Where the level of capital varies during the relevant period of account, the notional return must be calculated on these varying amounts.


The rate however must be limited to a reasonable rate of interest. It is not relevant that an equity return on the same investment might have been much greater.

The rates charged by so-called “payday” lenders or on credit card debts are not appropriate commercial comparators.

If the member receives some other form of return on capital, other than a share of the profit (for example, a fee), then this is deducted in arriving at the limit on the notional return.

Example 2

This example shows that the notional return is based upon a commercial rate of interest.

*B Ltd has invested £10,000 in ABC LLP. It receives no return on this other than its profit share. *

ABC LLP is paying 2% on loans on the commercial market, reflecting its good credit rating. This represents a commercial rate, so B Ltd has an appropriate notional return on capital of £200.