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HMRC internal manual

Corporate Finance Manual

Debt Cap: the available amount: partnerships

This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

Partnerships {#}

Partnerships are not directly subject to Corporation Tax. Instead, corporate members of a partnership may be subject to tax on a share of profits of the partnership or on allocated loan relationships debits or credits. However, for accounting purposes a partnership will in most cases be regarded as an entity in its own right, whose assets liabilities and results may be consolidated (or not consolidated) in the group’s financial statements. 

This creates the risk of distortions arising in applying the debt cap. For instance a UK group company may have a majority interest in a partnership, along with parties external to the group with a minority interest. The partnership will be fully consolidated so that all of its liabilities and funding expenses would be disclosed in the group’s consolidated accounts (the external party’s stake would be disclosed in minority interests). However, if the borrower is a UK group company, in computing the group’s tested expense amount or tested income amount, only a proportionate share would be taken into account, creating a mismatch.

Conversely, a group member that is not a UK group company may be a member of a partnership which is consolidated, despite the holding of a share of the partnership interests by non group members. If that partnership lends to a UK group company the lending and borrowing will eliminate and thus not feature in the group’s consolidated accounts (again, other than in minority interests), even though, to some extent, the UK group companies has, from a tax perspective, borrowed a part of the amount from parties external to the group.   

Such issues are addressed in TIOPA10/S332B to S332E, which deal with the computation of the available amount. S332B and 332C are treated as having always having had effect.  S332D and 332E were inserted by SI 2012/3111 and have effect in relation to periods of account of the worldwide group beginning on or after 1 January 2012 (subject to regulation 4, which provides that a worldwide group may elect that sections 332D and 332E do not apply in relation to periods of account of the worldwide group beginning before 14 December 2012). Although ‘member of a group’ is not a defined term in TIOPA10/PT7, it is clear that a reference to a member is to a corporate entity within the worldwide group and does not include a partnership even though, for accounting purposes, the partnership may be an entity in its own right consolidated in the financial statements of the worldwide group.

S332B and 332C concentrate on external expenses of a partnership whose members include parties external to the group and may have the effect of reducing the available amount, compared to the amounts disclosed in the group’s consolidated financial statements. Section 332B addresses the simple case where a member of the worldwide group is a member of a partnership and that partnership has a liability outstanding. Any expenses in respect of that liability that are disclosed in the financial statements of the worldwide group are not included in the available amount. Instead the available amount will include that expense which would have been included in the available amount if the member had been directly a party to its proportionate share of the expense. This will of necessity be an external expense because otherwise it would not have been included in consolidated financial statements. S332D extends similar. 

These provisions apply irrespective of whether the external funding is a direct obligation of a UK group company and irrespective of whether there is on-lending by the partnership.

S332D and 332E deal with financing that for accounting purposes is internal to the group but where a relevant group company (CFM90240 et seq.) incurs that expense on funding provided by a partnership whose members include parties external to the group. They can have the effect of increasing the available amount compared to the amount (normally zero) disclosed in the group’s consolidated financial statements.  Here again the amount (if any) disclosed in the group consolidated accounts is excluded from the available amount but a financing expense can be added to the extent the income of the partnership reflects the proportional share of an external partner. S332D deals with borrowings and s332E with finance leases and debt factoring.

These provisions only applies where a company within the UK tax net has been funded by a partnership.

No corresponding rules apply to the gateway test.