Mixed partnerships: new rules from HMRC

Mixed partnerships: new rules from HMRC


Author: Niall Murphy

HMRC published draft legislation on 10 December 2013 to deal with perceived tax avoidance by partnerships.

This article explores profit and loss allocations by partnerships, the special rules for alternative investment fund managers and the disposal of assets through partnerships, which lead to a tax advantage.

Typically, these new rules are aimed at mixed partnerships, ie partnerships which consist of both individuals and corporates.

The draft legislation indicates that the new measures will apply to partnership accounting years starting on or after 6 April 2014, with accounting periods which straddle that date being divided so that a new period of account is assumed to commence on 6 April 2014.

Profit and loss allocation schemes

A profit share allocated to a corporate partner may, under the draft legislation, be treated as being allocated to an individual if it is regarded as being excessive and it is reasonable to suppose that the individual partner has the 'power to enjoy' the whole or part of the profit attributable to the corporate partner.

The draft legislation indicates that this will be the case where the profit share exceeds:

  • the appropriate notional profit. This is calculated by reference to the commercial rate of interest on the capital contribution to the firm taking account of all the circumstances, less any return actually received in respect of the non-individual's capital contribution to the LLP that is not included in its profit share
  • the arms-length rate for services that the non-individual supplies. This is a small mark-up on the costs incurred in providing the services

An individual partner is treated as having power to enjoy the corporate partner's share if the individual partner is either connected with the corporate partner or satisfies one of the 'enjoyment conditions'.

Enjoyment conditions are widely defined so, where these arrangements are in place, it will be difficult to show that an individual partner does not have power to enjoy the corporate partner's share.

On the other side of the coin, where the legislation applies and an individual partner makes a loss in a trade or property business which arises wholly, partly, directly or indirectly in connection with relevant tax avoidance arrangements, no loss relief is available.

All partnerships with a corporate member will therefore need to review their current arrangements urgently, especially where those arrangements are in place to exploit the allocation of profits and losses between individual and corporate partners. It is suggested that HMRC intends to apply these rules to partnerships consisting entirely of non-individual members if it appears that the structure has been set up to avoid higher rates of personal income tax.

Special rules for alternative investment fund managers

Where the mixed partnership is the manager of an alternative investment fund, an individual/ partnership can elect for his deferred profits to be taxable on the firm.

The election must be made within six months of the end of the period of account which it affects. The firm will pay income tax on that income at 45%. If the profit ultimately vests with the partner who initially allocated it to the partnership, this is treated as taxable income of the partner in the relevant tax year, who then gets credit for the income tax paid by the partnership.

Under the legislation as currently drafted, if the profit is allocated to anybody else, whether another individual or corporate member, there is no credit for the tax originally paid by the partnership. This effectively results in double taxation.

Disposal of assets through partnership

The final change relates to the disposal of an asset or a right to income by or through a partnership from a member of the partnership or connected person (transferor) to another member where the main purpose or one of the main purposes is to obtain a tax advantage in relation to income tax or corporation tax. Where the legislation applies the 'relevant amount' is taxable as income of the transferor.


It is clear, from the draft legislation, that HMRC has not made any fundamental changes to the principles set out in its consultation document. Partnerships are going to have to adapt to the new rules at fairly short notice.