REV BN 23: Tax Avoidance: Companies in Partnerships

Who is likely to be affected?

1. Companies that are members of partnerships.

General description of the measure

2. This measure is an anti-avoidance measure which imposes a charge to corporation tax on a company which realises capital from a partnership, where the capital realised represents profits that would have been taxable on the company in the UK if profits had been allocated in proportion to shares of partnership capital.

Operative date

3. Applies to untaxed profits arising on or after today and reflected in realisations of partnership capital made on or after today.

Current law and proposed revisions

4. For tax purposes, profits and losses are computed for a partnership as a whole, but are then allocated to the partners in accordance with the shares agreed between the partners. Tax is then charged on each partner on the amount allocated to them as their share of the profit.

5. Avoidance schemes have been developed where profits are allocated between the partners to secure a tax advantage. One such scheme involves allocating all the income to a partner that is not liable to UK tax, and all the capital to the UK partner. The result is that the UK partner can realise what should have been taxable profits as a low-taxed or even untaxed increase in their capital share in the partnership.

6. From today, a charge to corporation tax will be made on a company where the following conditions are met:

• the company realises some or all of its capital from the partnership over and above the amount that it has contributed to or invested in the partnership; and
• some or all of the increase in the company's partnership capital has been derived from profits, arising on or after today, that would have been taxable in the UK had they been allocated to the company in proportion to its share of partnership capital.

7. Where these conditions are met the company will face a charge to Corporation Tax on an amount equal to the lower of the amount withdrawn or the amount of profit calculated under the second bullet above.

Further advice

8. If you have any questions about this change, please contact Graham Dean on 020 7438 7491.

www.inlandrevenue.gov.uk