Special rules apply when a leasing business is carried on by
companies in partnership.
Part 2 of Schedule 10 deals with the sale of lessor companies
and similar arrangements designed to shelter deferred tax (see
BLM80020). Part 3 of the Schedule deals
with avoidance arrangements designed to achieve similar benefits
involving leasing businesses carried on in partnership.
It is worth noting that any leasing business carried on in
partnership has almost certainly been set up with a view to
avoiding tax. The avoidance usually takes place about 6 years after
the partnership business has been set up when the losses have all
been used and the profitable partner wants to avoid the deferred
tax.
A typical arrangement works as follows.
When a company carries on a business in partnership the
company’s share of the profits or losses of the partnership
business are taxed as profits or losses of a separate notional
business carried on by the partner company. Where the partner
company has other profits or losses or is a member of a wider group
the partner or the wider group is able to exploit the timing
advantages that are derived from the availability of capital
allowances by setting early losses in the partnership leasing
business against other profits.
A change in the profit sharing arrangements or a sale of the
partner company can result in companies taking advantage of early
losses of the leasing business while later profits fall out of tax.
Example 1: change in interest in business
In this example A Ltd has profits and B Ltd has losses.
Stage 1: The early tax losses of the leasing business can be
set off against the profits of A Ltd. If A Ltd were a member of a
wider group the losses could be surrendered by A Ltd to cover
profits in the wider group.
Stage 2: When the business becomes tax profitable the
partnership sharing arrangements are changed so that B Ltd has most
of the profits. The losses of B Ltd are set off against the
partnership leasing profits or, if B Ltd is a member of a wider
group with losses, these losses could be used to cover the leasing
profits.
A similar effect can be achieved if there is a change in the
ownership of the partner company. Where this is the case, Part 3,
rather than Part 2, of Schedule 10 applies.
Example 2: change in ownership of partner
In this example the D group is profitable and the E group is
loss making. The partners' interests in the partnership business
remain the same.
Stage 1: The early tax losses of the leasing business can be
set off against he profits of the D group.
Stage 2: When the business becomes tax profitable the shares
in B Ltd are sold to E Ltd. The losses of the E group are set off
against the partnership leasing profits. The D group is not exposed
to the later profits of the leasing business.
The sale of lessors legislation deters this transaction by
treating as income an amount that reflects the timing advantage
gained from the capital allowances and as an expense an amount
equal to the income amount. These amounts are allocated to the
appropriate partner so that the ‘leaving’ partner feels
the effect of the income amount and the ‘joining’
partner feels the effect of the expense amount.
