Finance (No. 2) Bill (HC Bill 190)

Finance (No. 2) BillPage 420

(a) the making of M’s first contribution to the capital of the
limited liability partnership, and

(b) M being treated as having made a contribution by section
863F(2).

863E 5 M’s contribution to the limited liability partnership: the basic
calculation

(1) For the purposes of condition C in section 863D M’s contribution to
the limited liability partnership at a time is amount A.

(2) Amount A is the total amount which M has contributed to the
10limited liability partnership as capital less so much of that amount (if
any) as is within subsection (6).

(3) In particular, M’s share of any profits of the limited liability
partnership is to be included in the amount which M has contributed
to the partnership as capital so far as that share has been added to the
15partnership’s capital.

(4) In subsection (3) the reference to profits is to profits calculated in
accordance with generally accepted accounting practice (before any
adjustment required or authorised by law in calculating profits for
income tax purposes).

(5) 20Subsection (3) applies as well for the purpose of construing
references to contributions to the capital of the limited liability
partnership in sections 863D(12)(a) and 863F.

(6) An amount of capital is within this subsection if it is an amount
which—

(a) 25M has previously drawn out or received back,

(b) M is or may be entitled to draw out or receive back at any
time when M is a member of the limited liability partnership,
or

(c) M is or may be entitled to require another person to
30reimburse to M.

(7) In subsection (6) any reference to drawing out or receiving back an
amount is to doing so directly or indirectly.

863F M’s contribution to the limited liability partnership: deemed
contributions

(1) 35This section applies if—

(a) by the time mentioned in section 863D(3)(a), M has given an
undertaking (whether or not legally enforceable) to make a
contribution to the capital of the limited liability partnership
but has not made the contribution,

(b) 40the undertaking requires M to make the contribution by the
end of—

(i) the period of 3 months ending with 5 July 2014, or

(ii) if it ends after that date, the period of 2 months
beginning with the date on which M becomes a
45member of the limited liability partnership, and

(c) when it is made, the contribution will be included in amount
A under section 863E.

Finance (No. 2) BillPage 421

In the following subsections “the relevant period” means the period
mentioned in paragraph (b)(i) or (ii) (as the case may be).

(2) For the purpose of determining whether condition C in section 863D
is met—

(a) 5at the time mentioned in section 863D(3)(a), or

(b) at any subsequent time during the relevant period,

M is to be treated as having made the contribution at the time
mentioned in section 863D(3)(a) (so far as M has not (actually) made
the contribution at the time at which it is being determined whether
10condition C is met).

(3) If M (actually) makes the contribution (in whole or in part) during
the relevant period, the question of whether condition C is met is not
to be re-determined under section 863D(4) just because of the making
of the contribution (in whole or in part).

(4) 15If M does not (actually) make the contribution (in whole or in part)
by the end of the relevant period, any determination in relation to
which subsection (2) applied is to be made again (as at the time at
which it was originally made).

(5) In making a determination again—

(a) 20if it is the whole of the contribution which M does not make
by the end of the relevant period, subsection (2) is to be
ignored;

(b) if M makes part of the contribution by the end of the relevant
period, in subsection (2) references to the contribution are to
25be read as references to that part of it.

863G Anti-avoidance

(1) In determining whether section 863A(2) applies in the case of an
individual who is a member of a limited liability partnership, no
regard is to be had to any arrangements the main purpose, or one of
30the main purposes, of which is to secure that section 863A(2) does not
apply in the case of—

(a) the individual, or

(b) the individual and one or more other individuals.

(2) Subsection (4) applies if—

(a) 35an individual (“X”) personally performs services for a limited
liability partnership at a time when X is not a member of the
partnership,

(b) X performs the services under arrangements involving a
member of the limited liability partnership (“Y”) who is not
40an individual,

(c) the main purpose, or one of the main purposes, of those
arrangements is to secure that section 863A(2) does not apply
in the case of X or in the case of X and one or more other
individuals, and

(d) 45in relation to X’s performance of the services, an amount
falling within subsection (3) arises to Y in respect of Y’s
membership of the limited liability partnership.

(3) An amount falls within this subsection if—

Finance (No. 2) BillPage 422

(a) were X performing the services under a contract of service by
which X were employed by the limited liability partnership,
and

(b) were the amount to arise to X directly from the limited
5liability partnership,

the amount would be employment income of X in respect of the
employment.

(4) If this subsection applies, in relation to X’s performance of the
services, X is to be treated on the following basis—

(a) 10X is a member of the limited liability partnership in whose
case section 863A(2) applies,

(b) the amount arising to Y arises instead to X directly from the
limited liability partnership,

(c) that amount is employment income of X in respect of the
15employment under section 863A(2) accordingly, and

(d) neither that amount, nor any amount representing that
amount, is to be income of X for income tax purposes on any
other basis.

(4A) Section 863A(2) does not apply in the case of a member of a limited
20liability partnership if, apart from this subsection, it would apply in
consequence of arrangements the main purpose, or one of the main
purposes, of which is to secure that section 850C does not apply for
one or more periods of account in relation to—

(a) the member, or

(b) 25the member and one or more other members of the limited
liability partnership.

(5) In this section “arrangements” includes any agreement,
understanding, scheme, transaction or series of transactions
(whether or not legally enforceable).

2 30In Part 17 of CTA 2009 (partnerships) after section 1273 (limited liability
partnerships) insert—

1273A Limited liability partnerships: salaried members

(1) Subsection (2) applies at any time when section 863A(2) of ITTOIA
2005 (limited liability partnerships: salaried members) applies in the
35case of an individual (“M”) who is a member of a limited liability
partnership in relation to which section 1273(1) applies.

(2) In relation to the charge to corporation tax on income, for the
purposes of the Corporation Tax Acts—

(a) M is to be treated as being employed by the limited liability
40partnership under a contract of service instead of being a
member of the partnership, and

(b) accordingly, M’s rights and duties as a member of the limited
liability partnership are to be treated as rights and duties
under that contract of service.

45Supplementary provision: deductions

3 (1) ITTOIA 2005 is amended as follows.

Finance (No. 2) BillPage 423

(2) At the end of Chapter 5 of Part 2 (trade profits: rules allowing deductions)
insert—

Limited liability partnerships: salaried members
94AA Deductions in relation to salaried members

(1) 5This section applies in relation to a limited liability partnership if
section 863A(2) (limited liability partnerships: salaried members)
applies in the case of a member of the partnership (“M”).

(2) In calculating for a period of account under section 849 (calculation
of firm’s profits and losses) the profits of a trade carried on by the
10limited liability partnership, a deduction is allowed for expenses
paid by the partnership in respect of M’s employment under section
863A(2) if no deduction would otherwise be allowed for the
payment.

(3) This section is subject to section 33 (capital expenditure), section 34
15(expenses not wholly and exclusively for trade etc), section 45
(business entertainment and gifts) and section 53 (social security
contributions).

(3) In Chapter 3 of Part 3 (profits of property businesses: basic rules), in the table
in section 272(2) (application of trading income rules), after the entry for
20section 94A insert—

section 94AA deductions in relation to salaried members
of limited liability partnerships.

4 (1) CTA 2009 is amended as follows.

(2) 25At the end of Chapter 5 of Part 3 (trade profits: rules allowing deductions)
insert—

Limited liability partnerships: salaried members
92A Deductions in relation to salaried members

(1) This section applies in relation to a limited liability partnership if
30section 1273A(2) (limited liability partnerships: salaried members)
applies in the case of a member of the partnership (“M”).

(2) In calculating for an accounting period under section 1259
(calculation of firm’s profits and losses) the profits of a trade carried
on by the limited liability partnership, a deduction is allowed for
35expenses paid by the partnership in respect of M’s employment
under section 1273A(2) if no deduction would otherwise be allowed
for the payment.

(3) This section is subject to—

(a) section 53 (capital expenditure),

(b) 40section 54 (expenses not wholly and exclusively for trade etc),

(c) section 1298 (business entertainment and gifts), and

(d) section 1302 (social security contributions).

Finance (No. 2) BillPage 424

(3) In Chapter 3 of Part 4 (profits of property businesses: basic rules), in the table
in section 210(2) (application of trading income rules), after the entry for
section 92 insert—

section 92A 5deductions in relation to salaried members
of limited liability partnerships.

(4) In Chapter 2 of Part 16 (companies with investment business: management
expenses)—

(a) in section 1224(1) (accounting period to which expenses are
10referable) for “1227” substitute “1227A”, and

(b) after section 1227 insert—

1227A Management expenses in relation to salaried members of
limited liability partnerships

(1) This section applies in relation to a company if—

(a) 15as a member of a limited liability partnership, the
company is a company with investment business,

(b) section 1273A(2) (limited liability partnerships:
salaried members) applies in the case of a member of
the partnership (“M”), and

(c) 20expenses of management of the company’s
investment business are paid in respect of M’s
employment under section 1273A(2) but are not
referable to any accounting period under sections
1225 to 1227.

(2) 25The expenses are to be treated as referable to the accounting
period in which they are paid.

Supplementary provision: arrangements made by intermediaries

5 In Chapter 8 of Part 2 of ITEPA 2003 (application of provisions to workers
under arrangements made by intermediaries) in section 54 (deemed
30employment payment) after subsection (1) insert—

(1A) For the purposes of step 1 of subsection (1), any payment or benefit
which is employment income of the worker by virtue of section
863G(4) of ITTOIA 2005 (salaried members of limited liability
partnerships: anti-avoidance) is to be ignored.

35Commencement

6 (1) Subject to what follows, the amendments made by this Part are treated as
having come into force on 6 April 2014.

(2) Section 863G(4A) of ITTOIA 2005 (as inserted by paragraph 1) comes into
force on the day after the day on which this Act is passed.

Finance (No. 2) BillPage 425

Part 2 Partnerships with mixed membership

Main provision

7 (1) Part 9 of ITTOIA 2005 (partnerships) is amended as follows.

(2) 5In section 850 (allocation of firm’s profits and losses between partners) in
subsection (1) for “and 850B” substitute “to 850D”.

(3) After section 850B insert—

850C Excess profit allocation to non-individual partners

(1) Subsections (4) and (5) apply if—

(a) 10for a period of account (“the relevant period of account”)—

(i) the calculation under section 849 in relation to an
individual partner (“A”) (see subsection (6)) produces
a profit for the firm, and

(ii) A’s share of that profit determined under section 850
15or 850A (“A’s profit share”) is a profit or is neither a
profit nor a loss,

(b) a non-individual partner (“B”) (see subsection (6)) has a share
of the profit for the firm mentioned in paragraph (a)(i) (“B’s
profit share”) which is a profit (see subsection (7)), and

(c) 20condition X or Y is met.

(2) Condition X is that it is reasonable to suppose that—

(a) amounts representing A’s deferred profit (see subsection (8))
are included in B’s profit share, and

(b) in consequence, both A’s profit share and the relevant tax
25amount (see subsection (9)) are lower than they would
otherwise have been.

(3) Condition Y is that—

(a) B’s profit share exceeds the appropriate notional profit (see
subsections (10) to (17)),

(b) 30A has the power to enjoy B’s profit share (“A’s power to
enjoy”) (see subsections (18) to (21)), and

(c) it is reasonable to suppose that—

(i) the whole or any part of B’s profit share is attributable
to A’s power to enjoy, and

(ii) 35both A’s profit share and the relevant tax amount (see
subsection (9)) are lower than they would have been
in the absence of A’s power to enjoy.

(4) A’s profit share is increased by so much of the amount of B’s profit
share as, it is reasonable to suppose, is attributable to—

(a) 40A’s deferred profit, or

(b) A’s power to enjoy,

as determined on a just and reasonable basis.

But any increase by virtue of paragraph (b) is not to exceed the
amount of the excess mentioned in subsection (3)(a) after deducting
45from that amount any increase by virtue of paragraph (a).

But any increase by virtue of paragraph (b) is not to exceed the
amount of the excess mentioned in subsection (3)(a) after deducting
from that amount any increase by virtue of paragraph (a).

Finance (No. 2) BillPage 426

(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 the increase
in A’s profit share under subsection (4).

5(This subsection does not apply for the purposes of subsection (7) or
section 850D(7).)

(This subsection does not apply for the purposes of subsection (7) or
section 850D(7).)

(6) A partner in a firm is an “individual partner” if the partner is an
10individual and “non-individual partner” is to be read accordingly;
but “non-individual partner” does not include the firm itself where it
is treated as a partner under section 863I (allocation of profit to AIFM
firm).

(7) B’s profit share is to be determined by applying section 850 and, if
15relevant, 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)(a)(i).

(8) “A’s deferred profit”—

(a) 20is any remuneration or other benefits or returns the provision
of which to A has been deferred (whether pending the
meeting of any conditions (including conditions which may
never be met) or otherwise), and

(b) includes A’s share (as determined on a just and reasonable
25basis) of any remuneration or other benefits or returns the
provision of which to A and one or more other persons, taken
together, has been deferred (whether pending the meeting of
any conditions (including conditions which may never be
met) or otherwise).

(9) 30“The relevant tax amount” is the total amount of tax which, apart
from this section, would be chargeable in respect of A and B’s income
as partners in the firm.

(10) “The appropriate notional profit” is the sum of the appropriate
notional return on capital and the appropriate notional consideration
35for services.

(11) “The appropriate notional return on capital” is—

(a) the return which B would receive for the relevant period of
account in respect of B’s contribution to the firm were the
return to be calculated on the basis mentioned in subsection
40(12), less

(b) any return actually received for the relevant period of
account in respect of B’s contribution to the firm which is not
included in B’s profit share.

(12) The return mentioned in subsection (11)(a) is to be calculated on the
45basis that it is a return which is—

(a) by reference to the time value of an amount of money equal
to B’s contribution to the firm, and

(b) at a rate which (in all the circumstances) is a commercial rate
of interest.

Finance (No. 2) BillPage 427

(13) For the purposes of subsections (11) and (12) B’s contribution to the
firm is amount A determined under section 108 of ITA 2007
(meaning of “contribution to the LLP”).

(14) That section is to be applied—

(a) 5reading references to the individual as references to B and
references to the LLP as references to the firm, and

(b) with the omission of—

(i) subsections (5)(b) and (9), and

(ii) in subsection (6) the words from “but” to the end.

(15) 10“The appropriate notional consideration for services” is—

(a) the amount which B would receive in consideration for any
services provided to the firm by B during the relevant period
of account were the consideration to be calculated on the
basis mentioned in subsection (16), less

(b) 15any amount actually received in consideration for any such
services which is not included in B’s profit share.

(16) The consideration mentioned in subsection (15)(a) is to be calculated
on the basis that B is not a partner in the firm and is acting at arm’s
length from the firm.

(17) 20Any services, the provision of which involves any partner in the firm
in addition to B, are to be ignored for the purposes of subsection (15).

(18) A has the power to enjoy B’s profit share if—

(a) A is connected with B by virtue of a provision of section 993
of ITA 2007 (meaning of “connected” persons) other than
25subsection (4) of that section,

(b) A is a party to arrangements the main purpose, or one of the
main purposes, of which is to secure that an amount included
in B’s profit share—

(i) is charged to corporation tax rather than income tax,
30or

(ii) is otherwise subject to the provisions of the
Corporation Tax Acts rather than the provisions of
the Income Tax Acts, or

(c) any of the enjoyment conditions (see subsection (20)) is met
35in relation to B’s profit share or any part of B’s profit share.

(19) In subsection (18)(b) “arrangements” includes any agreement,
understanding, scheme, transaction or series of transactions
(whether or not legally enforceable).

(20) The enjoyment conditions are—

(a) 40B’s profit share, or the part, is in fact so dealt with by any
person as to be calculated at some time to enure for the
benefit of A, whether in the form of income or not;

(b) the receipt or accrual of B’s profit share, or the part, by or to
B operates to increase the value to A of any assets held by, or
45for the benefit of, A;

(c) A receives or is entitled to receive at any time any benefit
provided or to be provided (directly or indirectly) out of B’s
profit share or the part;

Finance (No. 2) BillPage 428

(d) A may become entitled to the beneficial enjoyment of B’s
profit share, or the part, if one or more powers are exercised
or successively exercised by any person;

(e) A is able in any manner to control (directly or indirectly) the
5application of B’s profit share or the part.

(21) In subsection (20) references to A include any person connected with
A apart from B.

(22) Subsection (23) applies if—

(a) the increase under subsection (4), or any part of it, is allocated
10by A to the firm itself under section 863I (allocation of profit
to AIFM firm), and

(b) B makes a payment to the firm representing any income tax
for which the firm is liable by virtue of section 863I in respect
of the amount of the increase allocated to it.

(23) 15For income tax purposes, the payment—

(a) is not to be income of any partner in the firm, and

(b) is not to be taken into account in calculating any profits or
losses of B or otherwise deducted from any income of B.

850D Excess profit allocation: cases involving individuals who are not
20partners

(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) 25if 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))
30has 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
35in 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) 40Condition 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) 45it 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—

Finance (No. 2) BillPage 429

(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
5account 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) 10A’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)
15after 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
20the firm’s profit under subsection (4).

(This subsection does not apply for the purposes of subsection (7) or
section 850C(7).)

(This subsection does not apply for the purposes of subsection (7) or
section 850C(7).)

(6) 25“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
30assumption 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) 35A 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
40partnership 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) 45Section 850C(18) to (21) applies for the purpose of determining if A
has the power to enjoy B’s profit share.