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

Excess profit allocation: cases involving individuals who are not partners

Section 850D targets arrangements where an individual who personally performs services for a firm is not themselves a partner, but profit is instead allocated to a non-individual partner in circumstances that suggest the arrangement is designed to gain a tax advantage.

• Where an individual ("A") personally performs services for a firm but is not a partner, and a non-individual partner ("B") receives a profit share, the rules may treat A as a partner and reallocate part of B's profit to A for income tax purposes
• The rules apply if it is reasonable to suppose that A would have been a partner but for the anti-avoidance provisions in section 850C, and either A's deferred profit is included in B's share (Condition X) or A has the power to enjoy B's profit share and that share exceeds the appropriate notional profit (Condition Y)
• A's deemed share of the firm's profit — determined on a just and reasonable basis — is chargeable to income tax for the tax year in which the relevant period of account ends, but is capped at the excess of B's profit share over the appropriate notional profit (after deducting any amount attributable to deferred profit)
• If B is itself chargeable to income tax, corresponding adjustments are made to reduce B's profit share to reflect A's deemed share, and partnerships associated with the firm (including limited liability partnerships) are automatically treated as meeting the condition that A would otherwise have been a partner