Revenue Note for Guidance
This section aims at preventing abuses in partnerships involving companies in the matter of group relief. The section is designed to ensure that relief for losses, etc can only be allowed in respect of a company’s share in a partnership profit or loss where the share really accrues to or is borne by the partner company. Where artificial arrangements exist, for example, where one partner pays another for its right to claim tax allowances or receives compensation for meeting actual losses, relief for losses in a partnership trade is to be confined within the partnership and is not available for relief against other profits of a partner which is a company.
(1) The company’s share of profits or loss is the amount net of capital allowances, etc (that is, it is the amount chargeable or allowable for corporation tax and is the equivalent of the company’s profits or loss in the several trade).
(2) The section applies to a company in a partnership carrying on a partnership trade if arrangements exist so that —
(3) Where the section applies, the following restrictions operate to keep within the “partnership net” the partnership profits or losses of an accounting period in relation to which artificial arrangements exist. Where there are such arrangements, the partner company is not able to use its share of the partnership profits or losses to reduce or satisfy the tax properly due on profits arising outside the partnership. In addition, the company cannot use tax relief from a non-partnership source to reduce tax payable on partnership profits.
(4) Where the partnership profits arise from a source assessable under Case IV or Case V of Schedule D, the company’s share is to be treated as if it arose from the exercise of a trade and any allowance to be made were an allowance to be made in taxing the profits of a trade.
The following examples show the type of transaction that could occur if this section was not in force. In all 3 of the following examples, Mr. X who has been carrying on business as a sole trader takes a company Y Ltd into partnership. Y Ltd does not put any capital into the business. Under the terms of the partnership deed, profits and losses are to be shared equally. Y Ltd pays corporation tax at the higher rate (see section 21A).
Separate arrangements may be made which in effect vary these terms.
For example
Partnership profits |
€20,000 |
Y Ltd’s half-share |
€10,000 |
Y Ltd sets off part of its own loss (unconnected with the partnership) against this €10,000 so that it does not have to pay corporation tax on it.
Y Ltd pays to Mr. X 60 per cent of €10,000 = €6,000. Y Ltd thus ends up with €10,000 – €6,000 = €4,000 which is €1,500 more than the corporation tax value (€10,000 @ 25% = €2,500) of the €10,000 loss which it could otherwise have carried forward for set-off against future profits.
Mr. X gets from Y Ltd |
€6,000 |
and avoids income tax at 41 per cent on €10,000 |
€4,200 |
€10,200 |
|
less the half-share of profits given over to Y Ltd |
€10,000 |
Mr. X thus also gains |
€200 |
The total gain, €1,500 + €200 = €1,700, is the result of switching profits of €10,000 from Mr. X’s income tax rate of 41 per cent to Y Ltd’s corporation tax rate of 25 per cent (that is, €10,000 @ 17%).
Partnership loss |
€20,000 |
|
Y Ltd’s half-share |
€10,000 |
|
Y Ltd sets off this loss €10,000 against part of its own profits |
||
Y Ltd saves corporation tax on €10,000 @ 25% = |
€2,500 |
|
Y Ltd gets from Mr. X 80 per cent of his half-share of the loss €10,000 = |
||
€8,000 |
||
€10,500 |
||
less half-share of loss taken over |
€10,000 |
|
Y Ltd thus gains |
€500 |
|
Mr. X saves the amount of the loss taken over by Y Ltd |
€10,000 |
|
less income tax relief he might have got on that loss €10,000 at 20 per cent = |
€2,000 |
|
Amount paid to Y Ltd 80 per cent of €10,000 = |
€8,000 |
€10,000 |
Mr. X gains |
€0 |
The total gain €500 is the result of switching of losses €10,000 from Mr. X’s income tax rate of 20 per cent to Y Ltd’s corporation tax rate of 25 per cent (that is, €10,000 @ 5%).
Partnership profits |
€40,000 |
half-share |
€20,000 |
|
Capital allowances |
€80,000 |
half-share |
€40,000 |
|
Notional loss |
€40,000 |
half-share |
€20,000 |
|
Y Ltd gets half-share of profits |
€20,000 |
|||
but does not have to pay corporation tax on this and sets off notional loss, €20,000, against its other profits, saving corporation tax €20,000 @ 25 per cent |
€5,000 |
|||
€25,000 |
||||
less payment to Mr. X 99 per cent of €25,000 = |
€24,750 |
|||
Y Ltd thus gains |
€250 |
|||
Mr. X gets from Y Ltd 99 per cent of €25,000 = |
€24,750 |
|||
less half-share of profit given over to Y Ltd |
€20,000 |
|||
less income tax relief he might have got on half-share of notional loss, €20,000, at 20 per cent |
€4,000 |
€24,000 |
||
Mr. X gains |
€750 |
The derivation of the total gain, €750 + €250 = €1000, is more complex in this case, but it is the end result of switching the half-share of capital allowances, €40,000, from Mr. X’s income tax rate of 20 per cent to Y Ltd’s corporation tax rate of 25 per cent.
Relevant Date: Finance Act 2019