PM227000 - Enjoyment Conditions
S850C (20) ITTOIA 2005
These conditions look at whether the individual, or a person connected to the individual, is in a position to enjoy the benefit of the profit share allocated to the non-individual.
The enjoyment conditions are:
- The non-individual member’s profit share, or the part, is in fact so dealt with by any person as to be calculated at some time for the benefit of the individual member, whether in the form of income or not;
- The receipt or accrual of the non-individual’s profit share, or the part, by or to the non-individual operates to increase the value to the individual member of any assets held by, or for the benefit of the individual member;
- The individual receives or is entitled to receive at any time any benefit provided or to be provided (directly or indirectly) out of the non-individual member’s profit share or the part;
- The individual may become entitled to the beneficial enjoyment of the non-individual’s profit share, or the part, if one or more powers are exercised or successively exercised by any person.
Although the test is widely drawn, it does not include all partnerships with mixed membership, as shown by the first example below.
Example 1
This is an example of a farming partnership where the landlord is represented by a corporate member.
A farm in Scotland is run as a partnership between the tenant farmer and a limited company owned by the landlord, who is not connected to the tenant.
This is a mixed membership partnership, but none of the enjoyment conditions are met.
The tenant farmer has no connection with the corporate member other than that they are partners in running the farm. The excess profit allocation rules do not apply.
The excess profit allocation rules are about the “power to enjoy”. The fact that the individual is not currently withdrawing any form of value from the non-individual does not alter the position.
Example 2
This example looks at where the enjoyment conditions are met but the profits are not currently being paid out.
A and his personal company A Ltd are both members of MBX LLP. Profits that can be withdrawn are allocated to A. The profits that A does not need to withdraw, for example as the LLP needs the money to finance expansion, are allocated to his personal company. In practice, A does not withdraw any money from A Ltd.
The excess profit allocation rules apply.
The key is that A Ltd is only getting the profit share because of A’s power to enjoy and the relevant tax amount is lower as a result of the arrangements. That A chooses not to extract the profits allocated to A Ltd at that time does not alter the fact that he has the power to enjoy them.
It is also possible that Condition X (deferred profit arrangements) applies to this arrangement, see PM218000.