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HMRC internal manual

Business Leasing Manual

Sale of lessor companies and similar arrangements: partnerships: identifying a ‘qualifying change’ - more complex arrangements

Section 415 CTA2010

Complex sharing arrangements can exist. For this reason the partner’s interest in a business is determined on a just and reasonable basis based, in particular, on the way in which a share of profits or losses is determined for section 1262 CTA2009 purposes but without regard to sections 1263 and 1264 of that Act and the allocation of capital allowances.

If it is just and reasonable to do so, matters not taken into account for these purposes may be considered here. If you think that other matters should be taken into account please seek advice from CTISA (CT&BIT) before advancing detailed arguments.

Example: partnership sharing arrangements

A Ltd and B Ltd carry on a business of leasing plant or machinery in partnership.

The partnership agreement entitles A Ltd to a 90% share of the profits or losses before capital allowances and 10% of the capital allowances. The balance of both profits and losses and capital allowances goes to B Ltd.

In year 1 the profits (before capital allowances) for the purposes of section 1262 CTA2009 etc are 100, capital allowances are calculated to be 500. The partnership computation is therefore:

S114 Profit 100
   
CAs (500)
Total profit or loss (400)

The shares are therefore:

A Ltd: 90 - 50 = 40

B Ltd: 10 - 450 = (440)

B Ltd would be limited to a loss of 400 - the ‘real’ loss for the accounting period. B Ltd therefore has a share of 100% of the profit or loss of the partnership.

In year 2 the profits for the purposes of section 1262 are still 100 but the capital allowances are now only 80.

The partnership computation is therefore:

S114 Profit 100  
     
CAs (80)  
Total profit or loss 20  

The shares are therefore:

A Ltd: 90 - 8 = 82

B Ltd: 10 - 72 = (62)

This time there is no loss and so A Ltd is taxed on the full profit of 20 and B Ltd’s losses are restricted to nil. B Ltd now has a 0% share in the profit or loss of the partnership.

B Ltd has fallen from a 100% share in the profit or loss to a 0% share in the profit or loss and there is a qualifying change in the interest of B Ltd so that a charge will be triggered.

NOTE: This arrangement would also be subject to the provisions in section 888 CTA2010 so that any losses derived from the business of leasing carried on in partnership would be restricted.