Business Income Manual: Computing the amount to assess: Mixed Membership Partnerships: Excess profit allocation: Anti-avoidance
ITTOIA/S850D: reallocation can be made to individuals who are not partners
Irrespective of the complexity of the structure, the excess profits allocation anti-avoidance legislation will apply if:
- the individual carries out work for the partnership or LLP,
- at that time the individual is not a member/partner
- a non-individual is a member/partner and receives a profit share
- the individual has “the power to enjoy” the profit share allocated to the non-individual or it is reasonable to suppose that the profit share includes deferred profits in relation to the individual; and
- it is reasonable to suppose that the individual would have been a partner in the absence of the excess profit allocation rules.
If the legislation applies, then the individual is treated as if they were a member of the partnership or LLP.
The mixed membership partnership test is then applied and the individual is taxed on the appropriate amount of the profits reallocated to them.
The “reasonable to suppose” test (that is the individual would have been a partner but for the excess profit allocation rules) is treated as met if the individual is a member of another partnership which is associated with the firm.
A partnership is associated with the firm if:
- it is a member of the firm, or
- it is a member of a separate partnership that is itself associated with the firm.
The excess profit allocation legislation came into force when it was announced on 5 December 2013.
This means that the legislation will apply to changes in the arrangements after 5 December 2013.
*Example 1 *
Example of the effect of the anti-avoidance rules where individual members resign and are replaced by personal service companies.
*X, Y, Z and XYZ Ltd are the members of XYZ LLP. In response to the new legislation, they decide that all the individual members should cease to be members of the LLP with effect from 6 December 2013 being replaced by their personal service companies. *
X, Y and Z continue to work for XYZ LLP, it is reasonable to suppose that they would have continued to be members but for the introduction of the legislation.
X, Y and Z are treated as members and the mixed membership partnership legislation applied accordingly.
Their share of the firm’s profit, determined under the mixed membership rules, is chargeable to income tax for the tax year in which the relevant period of account ends. Assuming this period straddles the 6 April 2014 (the date the legislation comes into effect), then this period is split into two notional periods with the latter having a commencement date of 6 April 2014. Only the profits attributable to this latter period will actually be re-allocated to X, Y and Z.
*Example 2 *
Example of the impact of the anti-avoidance rules.
*M, N, O and MNO Ltd are the members of MNO LLP. In response to the new legislation, they decide that from 1 April 2014 all the individual members should become members of MNO New LLP. From 1 April 2014, the members of MNO LLP will be MNO Ltd and MNO New LLP. Whilst M, N and O are the members of MNO New LLP. *
As MNO New LLP is an associated partnership it is assumed that M, N and O would have been members of MNO LLP. The mixed membership partnership legislation applies on the basis that they are deemed to have been members of MNO LLP.
*Example 3 *
Example of where the anti-avoidance rules do not apply to events before 5 December 2013.
*Firm A has only individual members. Before 5 December 2013, the individual partners decide to retire and transfer their interests in the partnership to limited companies which would become partners in their place. The actual transfer was carried out on 12 December 2013. *
Although the change was not made until 12 December, there is clear evidence to show that the decision was made before 5 December so the partners could not be aware of the mixed membership partnership legislation as at that time the new rules had not been published. As a result the anti-avoidance provisions do not apply.
The excess profit allocation legislation came into force when it was announced on 5 December 2013. It cannot be inferred that an individual would have been a member but for the new rules if the individual withdrew from a partnership before that date.