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HMRC internal manual

Business Income Manual

Business Income Manual: Computing the amount to assess: Mixed Membership Partnerships: Excess profit allocation: Payments by the non-individual out of its reallocated profit share


The Excess Profit Allocation rules mean that the profits are reallocated for tax purposes.

The reality is that the relevant profit share was allocated to the non-individual partner and that party still holds the money.

At some point, the money may need to pass from the non-individual to other persons. The legislation provides a rule to prevent the same profits suffering a disproportionate level of tax.

If as a result of an agreement in place in relation to the excess profit share allocated to the non-individual partner, that partner makes a payment to another person out of the excess profit share:

  • the payment is not treated as income of the recipient;
  • it is not taken into account in calculating the profits or losses of B or otherwise allowed as a deduction against B’s income;
  • It is not treated as a distribution.


This applies for both income tax and corporation tax purposes.


No set method:

There is no set method that has to be used. What is appropriate will vary from case to case depending on the facts of the case. What matters is the there is an agreement that means that the non-individual partner makes a payment to another person out of the excess profit.

It is important to note that the rule applies to a payment by the non-individual partner. If a payment is made in two steps, non-individual partner to Company A, who in turn pays the individual partner, then only the first step falls within the legislation.


The excess profit share

The excess profit share is so much of the non-individual’s profit share as is represented by the individual member’s profit as increased under S850C(4) or S850D(4).


No priority rule

There is no priority rule. The fact that the non-individual receives a profit share and then makes a payment on does not automatically mean that is a payment out of the excess profit share.


Out of excess profit share

The payment must be out of the excess profit share. If there is a single payment that is larger than the excess profit share then this cannot be divided into an amount falling within this provision and a second sum that does not.



This rule does not apply if the payment is part of a scheme or arrangement with a main purpose of obtaining a tax advantage.


Example 1

This looks at a “plain vanilla” payment from the corporate member to the individual member.

*A and his company A Ltd are members of ABC LLP. A has been taxed on £50,000 representing the excess profit allocated to A Ltd. A has an agreement with A Ltd that it will pay him £50,000. *

The sum is ignored for tax purposes; it is not treated as A’s income and is not deductible from A Ltd’s profits.


Example 2

This example addresses two concepts, the first where a payment made to a person connected to the individual member does not attract additional taxation, and the second where the payments are made after passing through a holding company partly owned by an unconnected party.

*AA Ltd receives £150,000 as its share of the profit of AA LLP. Under the excess profit allocation rules A is taxed on £130,000 of this by virtue of their power to enjoy the sum allocated to A Ltd. *

The excess part of AA Ltd’s profits share is £130,000.

*AA Ltd agrees to pay A £100,000. It pays £40,000 as a dividend to its parent company AABC Ltd. *

*AABC Ltd pays a dividend to its shareholders, A, B and C, who each receive £10,000. *

The payment of £100,000 is made as part of an agreement in connection with AA Ltd’s excess profit share. A is not taxable on this sum and it is not taken into account in arriving at the profits of AA Ltd.

The dividends received by A, B and C were not paid to them by AA Ltd and so fall outside the scope of the legislation.