PM163290 - Service companies

Partnerships may use a company owned by the partners to provide services to the partnership, referred to as a service company. It is common practice for partnerships to set up service companies to provide services to the partnership, such as the provision of staff, office accommodation and clerical services.

In such cases, the main issue is likely to be whether fees paid by the partnership to the company are allowable deductions in calculating profits of the partnership trade. Relevant factors to consider are:

• what services the company provides to the partnership
• the basis on which the company is remunerated for the services it provides
• whether the company and partnership are connected persons (see guidance on connected persons CFM35010).

The charge to the partnership for such services should be at no more than cost plus a modest uplift. If this is not the case, a transfer pricing adjustment may be required and advice should be sought from a local Transfer Pricing Specialist. You may also see cases where the service company provides services at cost with no uplift, but a transfer pricing adjustment is made to provide for an ‘arm’s length return’. You should consider whether the transfer pricing adjustment self assessed is reasonable with the help of a Transfer Pricing Specialist. Amendments to the compensating adjustments legislation, effective from 25 October 2013, was introduced in Finance Bill 2014.

In some cases the company providing services is also a partner in the partnership and receives a profit share. In this case the question is whether the company has a trade separate to the trade carried on in partnership. The company cannot claim expenses against the net profit allocated by the partnership. For further information on partners’ expenses see PM163260.