Income Tax (Trading and Other Income) Act 2005 section 850C

Excess profit allocation to non-individual partners

Section 850C targets arrangements where profits that should properly be taxed on an individual partner are instead allocated to a non-individual partner (such as a company or trust), thereby reducing the overall tax payable.

• Where a firm makes a profit and an individual partner ("A") has a profit share while a non-individual partner ("B") also has a profit share, the rules apply if either a profit deferral arrangement (Condition X) or a power-to-enjoy arrangement (Condition Y) exists
• If the conditions are met, A's taxable profit share is increased by the amount of B's profit share that is reasonably attributable to A's deferred profit or A's power to enjoy B's share, determined on a just and reasonable basis
• The increase under the power-to-enjoy rule is capped at the amount by which B's profit share exceeds what B would notionally earn from a commercial return on capital contributed plus arm's length consideration for services provided
• Where B is itself subject to income tax, corresponding adjustments are made to B's profit share to reflect the increase applied to A, and special rules apply where the firm is an alternative investment fund manager