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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: alternative finance: profit share agency arrangements

Profit share agency arrangements: conditions

A profit share agency arrangement is similar to a conventional bank savings account; in both cases the customer places money with a financial institution. Under this arrangement the party paying out the alternative finance return to the customer must be a financial institution whereas the customer may be either an individual, company or another financial institution.

CTA09/S506 describes the conditions that must be satisfied in order for a profit share agency arrangement to be classified as an alternative finance arrangement.

  • A person (‘the principal’) appoints a financial institution ‘FI’ (as defined in CFM44030) as his agent.
  • The agent (the ‘FI’) uses money provided by the principal with a view to producing a profit. The financial institution may invest the money provided by the principal in its own business or invest in third party businesses.
  • The principal is entitled to a specified amount of the profits resulting from the use of the money by the agent. For example, the principal may be entitled to profits equivalent to 4% of the amount deposited with the financial institution; if £10,000 was provided for a year, the principal would receive £400 - provided that the investment made a return of that amount.
  • The agent is entitled to any profit in excess of the specified amount. So, for example, in the above example if the agent made £500 profit the agent will retain £100 - i.e. the amount over and above £400 profit agreed as the alternative finance return to the principal. The arrangement may also provide for the agent to receive an agency fee separate to any amount received as a result of profits in excess of the agreed amount.
  • The payment or credit made by the financial institution to the customer is equivalent, in substance, to a return made on an investment of money at interest. The payments or credits made by the financial institution to the customer are the alternative finance return.

For an example of a profit share agency arrangement see CFM44110.