A mixed member partnership is a partnership or LLP with both individual and non individual members, typically individuals and their companies. Since 2014, section 850C of ITTOIA 2005 has moved profit allocated to a company member back to an individual member, for income tax purposes, where the company’s share represents the individual’s deferred profit (Condition X) or exceeds a commercial return for what the company contributes and the individual can benefit from it (Condition Y). The individual is then taxed on the excess at income tax rates and the company’s taxable share is cut to match.

Why do the mixed membership rules exist?

Companies can be partners in partnerships and members of LLPs. HMRC’s Partnership Manual (PM212000) explains that company members are often there for sound commercial reasons, but in some structures the company is used to reduce the overall tax on partnership profits, because profit allocated to a company is charged to corporation tax rather than to income tax and National Insurance at the individual’s rates. The Finance Act 2014 introduced the mixed membership rules to counter this.

A “non individual partner” is anyone other than an individual, so it includes companies and individuals acting as trustees (PM216000). One partner holding an asset on trust for the whole firm does not make it a mixed membership partnership. An AIFM firm that elects to be treated as a partner in itself is treated as an individual member for these purposes.

The rules apply only where a reallocation is justified. HMRC’s overview (PM214000) is clear that they do not apply where individual and non individual partners are genuinely independent, deal at arm’s length and are not deferring profit or seeking a tax advantage.

When do the rules reallocate profit?

Under section 850C(1), the rules apply for a period of account where the firm makes a profit, an individual partner’s share is a profit or nil, a non individual partner has a profit share, and either Condition X or Condition Y is met (PM217000). If both conditions are met, Condition X is applied first.

Condition X: deferred profit. It is reasonable to suppose that the company’s share includes the individual’s deferred profit, and as a result both the individual’s share and the total tax on the two shares are lower than they would otherwise be (section 850C(2)). Deferred profit includes any remuneration or other return whose provision to the individual has been held back, even if conditions attached to it may never be met, and amounts held back for a group of individuals (section 850C(8)). HMRC’s example (PM218000) is a member’s project bonus that is first allocated to the LLP’s corporate member until the project succeeds.

Condition Y: excess profit and power to enjoy. This needs all of the following (section 850C(3)):

  • the company’s profit share is more than its “appropriate notional profit”;
  • the individual has the “power to enjoy” the company’s share;
  • it is reasonable to suppose some or all of the company’s share is attributable to that power; and
  • both the individual’s share and the total tax are lower than they would be without it.

What is the appropriate notional profit?

It is the sum of two figures (section 850C(10) to (17)). The first is a notional return on the company’s capital contribution at a commercial rate of interest, not an equity return (PM221000). Capital means money or property contributed to the permanent endowment of the firm, valued at the time it was put in; current accounts and undrawn profits do not count. The second is the arm’s length value of services the company provides to the firm, which HMRC expects to be no more than cost plus a modest mark up (PM222000). Services that involve any member of the firm are ignored (section 850C(17)). So if the company’s “services” are really the individual members working through it as directors or employees, that element is nil (PM223000). Use of an asset can count: a company that lets the firm farm its fields rent free is providing services worth an arm’s length rent (PM222000).

When does an individual have the power to enjoy?

Section 850C(18) sets three alternative routes (PM224000):

  • the individual is connected with the company under section 993 of the Income Tax Act 2007, other than merely by being partners (PM225000), which covers the usual case of a member and their own company;
  • the individual is party to arrangements with a main purpose of getting an amount taxed under corporation tax rather than income tax rules, even with no economic link to the company (PM226000);
  • one of the enjoyment conditions is met, for example the company’s share increases the value of assets held for the individual, or the individual can receive a benefit out of it (PM227000).

HMRC’s contrasting examples help. A tenant farmer in partnership with a company owned by an unconnected landlord is outside the rules. A member who allocates the profit he does not need to draw to his own company, which retains it to fund the LLP’s expansion, is inside them, even though he takes nothing out of the company (PM227000). A small portfolio holding in a listed company member does not mean that company’s share is attributable to the individual (PM228000).

How is the reallocation worked out?

The individual’s share is increased by the part of the company’s share that it is reasonable to suppose is attributable to their deferred profit or power to enjoy, on a just and reasonable basis (section 850C(4)). Under Condition Y the increase cannot exceed the excess over the appropriate notional profit. Where several individuals are involved, the excess is split on a just and reasonable basis, starting from the proportions in which they actually share profits (PM230000). The company’s taxable share is then reduced on a just and reasonable basis, recognising that income tax and corporation tax computations can differ (PM231000). The partnership return shows the profit shares after these adjustments (PM214000).

Illustration only. Sam and his company, Sam Ltd, are the members of an LLP that makes a tax adjusted profit of £300,000. Under the agreement Sam takes £100,000 and Sam Ltd £200,000. Sam Ltd contributed £100,000 of capital, on which a commercial rate of interest would be £6,000, and provides no services other than through Sam. Its appropriate notional profit is £6,000 and the excess is £194,000. Sam is connected with Sam Ltd, so Condition Y is met. For tax, Sam’s share becomes £294,000 and Sam Ltd’s £6,000.

Section 850E then stops the same profit being taxed twice when it moves. If, under an agreement, the company pays the individual out of the reallocated excess, the payment is not income of the recipient, is not deductible for the company and is not a distribution (PM232000). In the illustration, Sam Ltd could pay Sam the £194,000 without a second tax charge. The relief does not apply where the payment is part of arrangements with a main purpose of obtaining a tax advantage.

Which related rules should you check?

  • Individuals who are not partners. Section 850D applies the same reallocation where an individual works for the firm, is not a partner, and it is reasonable to suppose they would have been a partner but for section 850C, for example where members resign and are replaced by their personal service companies (PM234000).
  • Salaried members. Section 863G(4A) stops the salaried member rules applying where arrangements to make someone a salaried member have a main purpose of avoiding section 850C.
  • Loans to participators. Amounts reallocated and charged to income tax under section 850C are not also charged under section 455 or 464A of the Corporation Tax Act 2010, but any further amounts can be (PM211400); see director’s loan accounts.
  • Losses. Sections 116A and 127C of the Income Tax Act 2007 deny individuals relief for losses allocated to them, rather than to a company, under arrangements with a main purpose of securing a tax advantage (PM244000, PM245000).
  • Capital allowances. The annual investment allowance is only available to partnerships whose members are all individuals, so a company member removes it (PM211200).

When did the rules start, and what mistakes do firms make?

The rules apply to periods of account beginning on or after 6 April 2014, with a split for periods straddling that date (PM243000). It makes no difference that the structure was set up before the rules were announced (PM214000); the test is applied to the facts of each period, and Condition Y must be checked every period (PM219000). Common errors include:

  • allocating residual profit to a member’s own company and treating the company’s services as justifying it, when those services are performed by members;
  • assuming that profit retained in the company, rather than paid out, is safe;
  • using a market equity return rather than a commercial interest rate for the notional return on capital;
  • forgetting to reduce the company’s share when increasing the individual’s, which taxes the same profit twice.

For the ordinary allocation rules that apply before any reallocation, see how partnership profits are shared for tax.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.