INTM489450 - The Unassessed Transfer Pricing Profits Examples: Example 13 - Lloyd's

Companies which have unassessed transfer pricing profits as a result of their membership of a partnership or a Lloyd’s syndicate can be subject to the UTPP rules, with some changes to the usual process to recognise that any profits or losses are allocated to that company from a separate return. For more information see INTM489280.

Facts

  • An aligned Lloyd’s syndicate has three corporate members: Company A; Company B; and a Limited Liability Partnership (LLP). The partners of the LLP are all individuals.
  • The syndicate profits are allocated equally between the syndicate members.
  • The syndicate is managed by the group’s managing agent.
  • The managing agent and the corporate members are under common ownership.
  • The syndicate has £30m unassessed transfer pricing profits for an accounting period.

Analysis

  • The syndicate has unassessed transfer pricing profits which were not included within its tax return, and so the UTPP rules are applied to the syndicate. However the syndicate is not a chargeable person for tax purposes, and so the corporate members of the syndicate, which are within scope of UK corporation tax, are charged to corporation tax on their share of the unassessed transfer pricing profits. 
  • In this example, only Company A and Company B’s profits can be subject to a UTPP assessment. This is because the LLP only has individual members.
  • We consider the total unassessed transfer pricing profits of the syndicate when considering the ETMO and TDC tests to determine whether UTPP applies. 
  • Where the conditions for UTPP are met we then calculate the unassessed transfer pricing profits which arise to Company A and Company B, and it is these profits that will be assessed to corporation tax.  
  • Company A and Company B each have unassessed transfer pricing profits of £10m for the accounting period. This is their share of the syndicate’s unassessed transfer pricing profits if they were taken to be the syndicate’s profit for the accounting period.
  • In determining whether there is an ETMO, the underlying corporation tax amount is calculated by multiplying Company A and Company B’s unassessed transfer pricing profits, by the underlying corporation tax rate for those profits. This is then compared to the relevant tax due and payable by the other party to the provision on profits that correspond to Company A and Company B’s proportion of the unassessed transfer pricing profits. 
  • The TDC considers whether it is reasonable to assume that the structure of the transaction or series of transactions by which the provision to which the syndicate’s unassessed transfer pricing profits relate is imposed (or any arrangements to which the transaction/series of transactions relate) is designed to have the effect of reducing, eliminating or delaying the liability of any person to pay UK tax. This means that if the arrangements were designed to reduce either Company A or Company B’s UK tax liability, then the TDC will be met.
  • A UTPP preliminary notice is issued to the managing agent, who can make any representations (under S217G) on the syndicate members’ behalf (although in practice any information or arguments provided directly by Company A or Company B to HMRC will be taken into account to make the best estimate of the companies’ unassessed transfer pricing profits).
  • Having considered any representations, a designated officer of HMRC will assess Company A and Company B’s unassessed transfer pricing profits.  Notice of the assessments should be issued to Company A and Company B, with copies to the managing agent.
  • During the period for amendments, the managing agent may amend the syndicate return for the accounting period so that the calculation of the syndicate’s profits more fully reflect the transfer pricing requirement. HMRC must give effect to any amendment for each corporate member. In this scenario, HMRC will give effect to an amendment by amending Company A and Company B’s company tax returns. Since the amendment takes effect immediately, there will be a commensurate reduction in the amount of unassessed transfer pricing profits.
  • If after the end of the period for amendments, the syndicate wishes to appeal against any remaining assessment of the unassessed transfer pricing profits, then the managing agent must submit an appeal on behalf of both Company A and Company B. The managing agent can only submit an appeal if both Company A and Company B have paid in full the corporation tax charged on the unassessed transfer pricing profits (excluding any amounts postponed).  
  • If HMRC considers that the individual members of the LLP should be taxed on their share of the uplift of the syndicate’s profits as a result of the inclusion of the unassessed transfer pricing profits, then HMRC will open enquiries or discovery assessments to bring these amounts into tax.