Corporate debt rules for corporate partners

Corporate debt rules for corporate partners

Thu 06 Mar 2014

Following consultation on the corporate debt rules as a whole, legislation is to be introduced in Finance Bill 2014 which clarifies and consolidates the rules so far as they apply to companies that are members of partnerships.

HMRC first issued a consultation document on the modernisation of corporate debt in June 2013.  A summary of responses was issued by HMRC in December 2013, in which they advised that a small number of changes would be made in Finance Bill 2014 but that the bulk of changes would be made in Finance Bill 2015.

One specific area earmarked for change in Finance Bill 2014 concerns the taxation of companies that are members of a partnership.  The general principle being established is that all the rules applying to companies that are party to loan relationships also apply to corporate partners in “firms” (i.e. partnerships) where those firms are party to loan relationships. 

The key features of the legislation are as follows:

  • Each corporate partner is to be treated as if they were themselves a party to the debt held by the firm, to the extent of that corporate partner’s appropriate share in the firm.
  • Anything done by or in relation to the firm is treated as if it were done by or in relation to the corporate partner (and where relevant, to the extent of that corporate partner’s appropriate share).
  • It follows, therefore, that in applying the rules contained in CTA 2010 s1259 which deal with the calculation of the firm’s taxable profits (for the purpose of their allocation between partners), no account should be taken of debits or credits relating to money debts/loan relationships to which the firm is a party.
  • Where the tax treatment of a loan relationship operates by reference to accounts of the company, one must look at the accounts of the firm when seeking to tax the corresponding item in the corporate partner. 

A partner’s appropriate share is based on the amount that would be apportioned in accordance with the firm’s profit sharing arrangements.  (This may be complex in practice, depending on the profit sharing arrangements as set out in the partnership agreement.)

One impact of the above is that where a corporate partner makes a loan to the firm, that corporate partner could be treated as both creditor and debtor in relation to the same loan relationship.  In such circumstances, the loan is to be treated as a “connected companies relationship”.

There will, likewise, be a “connected companies relationship” where a corporate partner (together with any other corporate partners) control the firm and

–      another corporate partner has made a loan to the firm, or

–      the firm has made a loan to another corporate partner.

The changes will come into effect on and after the date of Royal Assent for Finance Bill 2014.

This is the first change put forward as part of and following consultation on the modernisation of corporate debt.  Consultation is ongoing on other areas of the corporate debt regime, with a view to the main changes to the regime being included in Finance Bill 2015.

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