Income Tax (Trading and Other Income) Act 2005 section 164

Special rules for partnerships

Section 164 sets out two special rules that apply when calculating the trading profits of a partnership (firm) that is treated as making a deemed employment payment in connection with its trade, profession or vocation under the intermediaries (IR35) legislation.

• The deduction for a deemed employment payment under section 163 cannot exceed the amount that would reduce the firm's profits for the tax year to nil — it cannot create a trading loss.
• The firm's allowable expenses relating to the relevant engagements are capped at 5% of the gross income figure used in step 1 of the deemed employment payment calculation under section 54(1) of ITEPA 2003, plus the amount deductible at step 3 of that same calculation.
• These rules ensure that partnerships operating through intermediary arrangements can only claim deductions consistent with what would have been allowable had the worker been a direct employee, plus a small margin for the firm's own running costs.
• The terms "deemed employment payment" and "the relevant engagements" take their meanings from Chapter 8 of Part 2 of ITEPA 2003, which contains the intermediaries legislation.

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