In this guide we refer to a trust or company as the service entity.
A service arrangement will generally show all or most of the following features:
- The taxpayer (and this could be a sole proprietor, a partner in a professional partnership or a company) carries on a business or professional practice in a field such as accountancy, law, medicine or pharmacy.
- There is a trust that is controlled, or a company that is owned or controlled, by the taxpayer or the taxpayer and associates.
- The taxpayer, alone or in partnership, enters into an agreement with the service entity for the taxpayer to pay certain fees and charges in return for the service entity providing certain services. These services could include staff hire, recruitment, clerical and administrative services, provision of premises, plant or equipment, or a combination of services.
- Typically, the service fees and charges are calculated by way of a mark-up on some or all of the costs of the service entity (although a fixed charge may be agreed on by the parties up-front).
- The taxpayer (or professional partnership) claims a deduction for the service fees and charges as expenditure it has incurred in the conduct of its business.
- The service arrangement either gives rise to profits in the service entity, for both accounting and tax purposes, or would give rise to profits in the service entity except for remuneration or service fees paid to associates of the taxpayer or the taxpayer's partners.
- The profits derived by the service entity are either retained by the service entity (usually where the service entity is a company) or distributed (directly or indirectly) to the taxpayer (or partners in the case of a partnership) and/or to associates of the taxpayer (and associates of the partners in the case of a partnership).
Example: A typical service entity arrangement
In our experience, conventional service arrangements are typically entered into by lawyers and accountants, although we have also seen service arrangements involving other professionals, such as medical practitioners and pharmacists. The professional practices that use service arrangements range from large practices to small, micro and individual practitioners.
There are service arrangements that differ significantly from the conventional arrangements described above.
Our experience and concerns have been with conventional arrangements which are the focus of this guide. We will continue to respond to concerns we see with these other types of service arrangements as appropriate.