Section 850D — Finance Act 2014: Excess profit allocation: cases involving individuals who are not partners

Excess profit allocation: cases involving individuals who are not partners 850D 1 Subsections (4) and (5) apply if—

a at a time during a period of account (“the relevant period of account”) in respect of a firm, an individual (“A”) personally performs services for the firm, b if A had been a partner in the firm throughout the relevant period of account, the calculation under section 849 in relation to A for the relevant period of account would have produced a profit for the firm, c a non-individual partner (“B”) in the firm (see subsection (6)) has a share of that profit (“B's profit share”) which is a profit (see subsection (7)),

d it is reasonable to suppose that A would have been a partner in the firm at a time during the relevant period of account or any earlier period of account but for the provision contained in section 850C (see also subsections (8) to (10)),

and e condition X or Y is met.

2 Condition X is that it is reasonable to suppose that amounts representing A's deferred profit (see subsection (11)) are included in B's profit share.

3 Condition Y is that—

a B's profit share exceeds the appropriate notional profit (see subsection (12)),

b A has the power to enjoy B's profit share (“A's power to enjoy”) (see subsection (13)),

and c it is reasonable to suppose that the whole or any part of B's profit share is attributable to A's power to enjoy.

4 A is to be treated on the following basis—

a A is a partner in the firm throughout the relevant period of account (but not for the purposes of section 863I (allocation of profit to AIFM firm)),

b A's share of the firm's profit for the relevant period of account is so much of the amount of B's profit share as, it is reasonable to suppose, is attributable to—

i A's deferred profit, or ii A's power to enjoy, as determined on a just and reasonable basis, and c A's share of the firm's profit is chargeable to income tax under the applicable provisions of the Income Tax Acts for the tax year in which the relevant period of account ends. But A's share of the firm's profit by virtue of paragraph (b)(ii) is not to exceed the amount of the excess mentioned in subsection (3)(a) after deducting from that amount A's share of the firm's profit (if any) by virtue of paragraph (b)(i).

5 If B is chargeable to income tax, in applying sections 850 to 850B in relation to B for the relevant period of account, such adjustments are to be made as are just and reasonable to take account of A's share of the firm's profit under subsection (4). (This subsection does not apply for the purposes of subsection (7) or section 850C(7).) 6 “ Non-individual partner ” is to be read in accordance with section 850C(6).

7 B's profit share is to be determined by applying section 850 and, if relevant, section 850A in relation to B for the relevant period of account (whether or not B is chargeable to income tax) on the assumption that the calculation under section 849 in relation to B produces the profit for the firm mentioned in subsection (1)(b).

8 The requirement of subsection (1)(d) is to be assumed to be met if, at a time during the relevant period of account, A is a member of a partnership which is associated with the firm.

9 A partnership is “associated” with the firm if—

a it is a member of the firm, or b it is a member of a partnership which is associated with the firm (whether by virtue of paragraph (a) or this paragraph).

10 In subsections (8) and (9) “ partnership ” includes a limited liability partnership whether or not section 863(1) applies in relation to it. 11 “ A's deferred profit ” is to be read in accordance with section 850C(8).

12 Section 850C(10) to (17) applies for the purpose of determining “the appropriate notional profit”; and A is to be treated as a partner in the firm for the purposes of section 850C(17).

13 Section 850C(18) to (21) applies for the purpose of determining if A has the power to enjoy B's profit share.