HMRC Clarifies Partnership Eligibility for Capital Allowances claims

In an important update for partnership eligibility for Capital Allowance claims, with a blend of individual and corporate members, HM Revenue and Customs (HMRC) has recently refined its guidance on Capital allowances.

According to the revised guidelines, a partnership that includes a corporate member can now claim certain Capital Allowances that were previously limited to companies. This includes the 130% super deduction and full expensing options. This clarification comes as a relief and provides a clearer path for tax planning within mixed partnerships.

How Profits Are Calculated for Different Types of Partnerships

The way profits are calculated in partnerships hinges on its members, for example:

• If all partners are individuals, the profits are assessed under income tax rules, treating the partnership as a notional individual.
• In cases where all partners are companies, the profits are calculated under corporation tax rules, with the partnership seen as a notional company.
• For mixed partnerships (comprising both individuals and companies), two separate calculations are required – one for the notional individual and another for the notional company.

Capital Allowances for the Notional Company

The updated HMRC Capital Allowances Manual (CA 11145) now confirms that, in determining the profits for the notional company portion of a mixed partnership, claims can be made for capital allowances exclusive to companies. This includes the much-discussed 130% super deduction and full expensing. However, these claims are contingent on meeting all the normal qualifying conditions.

Restrictions on Annual Investment Allowance (AIA)

It’s important to note that partnerships with at least one corporate member are ineligible to claim the Annual Investment Allowance (AIA) in calculating profits for either the notional company or the notional individual. AIA is reserved for “qualifying persons” only, defined as individuals, companies, or partnerships where all members are individuals, as per s38A of the Capital Allowances Act 2001.

Implications for Mixed Partnerships

This update from HMRC is a crucial one, particularly for mixed partnerships seeking to maximise their tax efficiency. This change allows partnerships with corporate members to access Capital Allowances like the 130% super deduction and full expensing, which were previously exclusive to companies. This is a pivotal development as it opens the door for substantial tax savings and increased capital investment opportunities for these partnerships.

However, the exclusion of the Annual Investment Allowance (AIA) for mixed partnerships highlights the nuanced and complex nature of tax planning in this area. It is essential for mixed partnerships to carefully analyse their structure and investments to fully leverage these changes.

Strategic planning and consultation with Capital Allowance experts remain the key to navigating these updates effectively, ensuring that mixed partnerships maximise their potential benefits while remaining compliant with the new regulations. This development not only offers immediate financial advantages but also signals a more inclusive approach by HMRC towards different business structures, potentially encouraging more diverse and collaborative business partnerships in the commercial sector.

For commercial property owners and partnerships looking to understand how these changes might affect their tax position, expert guidance is key.

You can read the full summary from the Institute of Chartered Accountants in England and Wales (ICAEW).