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HMRC internal manual

Business Income Manual

Business Income Manual: Computing the amount to assess: Mixed Membership Partnerships: Excess profit allocation: Pseudo share schemes/membership benefit schemes

This part of the guidance looks at how the mixed membership partnership legislation applies to schemes that are intended to mimic the effect of a share scheme for employees. Many such schemes will be deferred profit arrangements within Condition X of the legislation.

Unlike a partnership which is simply a relationship between persons, an LLP is a body corporate and can be distinguished from its members.

The LLP is governed by the LLP agreement. In some cases, the LLP agreement provides for the LLP to have something comparable to the share capital in a limited company.

Other schemes involve buying shares in a limited company linked to the LLP.

The excess profit allocation rules will apply where a non-individual member receives a profit share that is used to:

  • buy shares of “units” that are intended as rewards for individual members;
  • buy shares or units back from individual members.


Example 1

This example involves a corporate member that is used as part of a “share scheme” for partners.

*L Ltd is a corporate member of LMN LLP. It receives a profit share which it uses to buy shares in a related company LMN Plc. It is agreed that if certain events take place, the shares will be transferred to individual members. *

The excess profit allocation rules apply as this is a deferred profit so Condition X is satisfied. Under S850C (8), the fact that there are conditions that may not be satisfied does not affect the position.


*Example 2 *

This example involves a corporate member of a partnership that uses warehoused profits to buy the “interests” of individual members seeking to retire.

*P is a member of PQR LLP. P is approaching retirement and is looking to retire. The partnership operates an exit mechanism whereby profits are allocated to and allowed to accumulate in PQR Ltd, the corporate member of PQR LLP, in order to buy retiring partners’ interests at their “market value”. *

P meets the enjoyment conditions in relation to part of the profit allocated to PQR Ltd in the years prior to his retirement. PQR Ltd is only getting this profit share because of P’s power to enjoy and the relevant tax amount is lower as a result of the arrangements.

It is also possible that this is an arrangement that has a main purpose of securing corporation tax treatment of the profit, and that Condition X (profit deferral arrangements) applies.