BLM81005 - Sale of lessor companies and similar arrangements: partnerships: introduction
Special rules apply when a leasing business is carried on by companies in partnership.
Chapter 3 of part 9 deals with the sale of lessor companies and similar arrangements where there is a risk that profits deferred for tax purposes will fall out of charge. (see BLM80020). Chapter 4 of the Schedule deals with arrangements designed to achieve similar effects involving leasing businesses carried on in partnership.
It is worth noting that many leasing business carried on in partnership were 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 tax on the deferred profits.
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.
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.