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HMRC internal manual

Business Income Manual

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Business Income Manual: Computing the amount to assess: Mixed Membership Partnerships: Excess profit allocation: Appropriate notional consideration for services: restriction

ITTOIA/S850C (17)

When calculating the appropriate consideration for services, any services that involve an individual who is a member are excluded from the calculation.

A purpose of the excess profit allocation rules is to ensure that the profits generated by an individual’s work for the partnership are taxed on that individual rather than on a corporate partner at CT rates.

  • This includes where the individual carries out work for the partnership either as an employee or contractor to the corporate member.
  • It applies where there is a chain of intermediaries between the partnership and the individual, no matter how long the chain, nor how complex.

 

This prevents arguments about whether the individual carries out some services as a partner other as employee of the corporate member.  The legislation operates on the premise that the company is not to be entitled to any profit share for these services and as if any profit actually allocated to the company were treated for tax as reallocated to the individual member. 

Example 1

This example shows how there is no notional consideration for services when the services involve other partners.

*Continuing with example 3 at BIM82760, B Ltd is a member of ABC LLP and provides advertising services for ABC LLP. The work is carried out for B Ltd by A, who is also a member of ABC LLP. B Ltd provides no other services to ABC LLP. *

B Ltd is treated as providing no services as the only service provided involves another member of the LLP. Therefore, the appropriate notional consideration for services is nil.

As such, B Ltd has an appropriate notional profit of £200, consisting purely of its notional return on capital.

Example 2

This example looks at where the partners themselves are also working for the corporate member.

*HED LLP has as members D, E, F, G and H together with a corporate member, HED Ltd. HED Ltd provides management services to the LLP which is carried out by H, E and D as directors of HED Ltd. *

Whilst the work was carried out by the directors of the company, these directors are also members in their own right. As the work was done by members the appropriate notional consideration for services is NIL. That the work was done in their capacity as directors of the corporate member makes no difference.

Sometimes work may be done partly by other members and partly by non-members.

*Example 3 *

This example looks at where people other than the partners themselves are working for the corporate member.

*DHE LLP has as members D, E, F, and H together with a corporate member, DE Ltd. DE Ltd provides management services to the LLP which is carried out by three unconnected individuals and D and E as directors of DE Ltd. *

The appropriate notional consideration for the work done by D and E, who are members of DHE LLP, services is NIL. That the work was done in their capacity as directors of the corporate member makes no difference.

If the work done by the three non-members can be distinguished from the work done by the members then the appropriate notional consideration for services is arm’s length value of these services. If the work cannot be distinguished then the appropriate notional consideration is NIL.

*Example 4 *

This example looks at where the services are provided by members via a chain of intermediaries.

*The members of FM LLP are the individuals M, N & O and a corporate member X Ltd. *

*M, N and O are also employees of Y Ltd an offshore employer. *

*Y Ltd contracts with X Ltd to supply it with the services of M, N and O. *

X Ltd is the managing member of FM LLP, with the work being done by M, N and O on secondment to X Ltd. X Ltd receives a profit share for acting as managing member.
 

The question is what is the appropriate notional consideration for services?

The legislation looks at whether the work involves any member other than that corporate member. It does not look at the link between that member and the corporate member.

In this case, the work is actually done by individuals who are members of FM LLP. As a result the appropriate notional consideration for services is NIL.

Example 5

This example looks at how the test is whether the individual provides the services, not the nature of the services.

EHD LLP has as members D, E, F, G and H together with a corporate member EHD Ltd. Under the LLP agreement the management of the LLP is delegated to EHD Ltd, the individual members are specifically excluded from taking part. As members, the individuals D, E and H manage portfolios of investments. As directors of EHD Ltd, they manage the LLP.

The LLP is managed by the directors of the company, these directors are also members in their own right. As the work was done by members the appropriate notional consideration for services is NIL.

The fact that under the LLP agreement the individuals are not allowed to take part in the management of the LLP does not affect the position under the excess profits allocation rules. The services provided by the corporate member involved individual members, so no credit is given for the services provided.