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| Limited Company | Limited Liability Partnership and Limited Partnership |
| ESTABLISHING THE VEHICLE | ||
| Shareholder/ partner financing of Special Purpose Vehicle (SPV) | Where JV Co is financed by way of debt, consideration should be given as to whether interest incurred by JV Co is tax deductible. For example, an interest deduction may not be available if the debt instrument used is considered equity for UK tax purposes or not lent down on arm's-length terms. Specialist advice should be sought on this if appropriate. A UK corporate shareholder is likely to be taxable on the corresponding receipt of interest. | Same issues as for a limited company. |
| Transferring property to SPV | Any transfer of property from a taxpaying shareholder to JV Co is likely to give rise to direct tax issues. For example, the transfer of a building to JV Co may result in a capital gains liability for the shareholder, or a balancing charge for capital allowance (tax depreciation) purposes. The nature of the issues will depend on the property being transferred, the use to which the property is intended to be put and the tax profile of the shareholder. The purchase price paid for property or assets may have to be apportioned to individual assets which could affect the tax allowances available (e.g. allocated to plant and machinery rather than land and buildings). | Same issues as for a limited company. |
| OPERATIONAL ISSUES | ||
| Basis of taxation | Profits are subject to corporation tax in the company at the JV Co's marginal rate. Distributions to shareholders by way of dividend should not be taxable on UK corporate or public sector recipients. | LLPs and LPs are transparent for tax purposes, so taxable profits are attributed directly to the partners/members. Whether tax is payable on the partnership's profits will depend upon the tax profile/status of the partners/members. |
| SPV's tax status | The direct tax treatment of JV Co will turn on whether it is a trading company or an investment company. This status will determine: under what 'schedule' income is taxed; whether certain expenditure is capital or revenue for tax purposes; and what tax reliefs are available. | Same issues for corporate partners/members as would arise in a limited company. |
| Tax rate | JV Co will be subject to UK corporation tax. The mainstream rate of corporation tax is currently 28% but lower rates may apply in the case of some smaller companies. | As stated above, profits are attributed directly to the partners/members. Corporate partners/members, regardless of residence, will be subject to UK corporation tax on those profits as normal. |
| Impact of accounting treatment | While JV Co's accounting policies will be taken into account in determining whether certain expenditure is treated as capital or revenue for tax purposes and the timing of tax relief for revenue expenditure, the issue of whether expenditure is treated as capital or revenue is ultimately a question of law. JV Co's accounting profits are unlikely to equal its tax profits due to permanent differences (non-deductible expenditure) and timing differences (e.g. where capital allowances do not equal accounting depreciation). | Same issues for partners/members as for a limited company. |
| Capital allowances | A number of issues may arise in relation to capital allowance claims in respect of JV Co's eligible assets. The issues will hinge on the nature of the property and the interest held in it by JV Co. | Same issues for partners/members as for a limited company. |
| Tax losses | Trading losses can be used in a number of ways by JV Co, including surrender to corporates by way of group relief or consortium relief. Non-trading losses can also be used in a number of ways including surrender to corporates by way of group relief. However, depending upon the exact nature of the company's trade/business, there can be a restriction on the surrender of losses by way of consortium relief. | Partners/members obtain their share of losses according to ownership percentages. Utilisation of losses can be restricted to the amount of capital contributed to the partnership less amounts withdrawn (plus, potentially retained profits). Where utilisation is not possible, the losses are carried forward in the partnership. |
| Capital gains | Capital gains or losses may be generated by JV Co when it disposes of capital assets. Advice may be required to ensure that JV Co claims all relevant reliefs. | Capital gains or losses may be generated by the partnership when it disposes of capital assets. These gains or losses are attributed directly to the partners/members. As for a limited company, advice may be required to ensure that all relevant reliefs are claimed. The capital gains tax legislation surrounding the admission/exit of partners/members can be complex. It may be possible to avoid accelerating the tax liabilities of continuing partners/members but it is strongly recommended that specialist advice is sought in this area. |
| Withholding tax | Payments by JV Co, especially interest and royalties for the use of intellectual property, may be subject to withholding tax although generally this does not apply for payments to UK companies. Where these payments are being made to non-residents the withholding tax liability may be reduced under a double tax agreement. | Same issues as for a limited company. |
| SHAREHOLDER / PARTNER ISSUES | ||
| Tax status | The public sector shareholder's tax status will vary from case to case and should be fully understood when structuring JV Co. | Same issue as for a limited company. Specifically, it will need to be understood whether the carrying on of activity through the LLP/LP will constitute a taxable activity for the public sector body. |
| Profit extraction | Taxation of distributions from the JV will need to be considered. Generally receipt of a dividend by a UK resident corporate or public sector shareholder will not be a taxable receipt. | Not applicable as profits are attributed directly to the partners/members. The income and gains of the LLP/LP are attributed to the partners/members as they arise and there is no further tax payable by the partners/members as and when the profits are distributed. |
| Residency | If the private sector shareholder is not a UK tax resident a number of international tax issues may need consideration. For example, particular care will be required where payments are to be made by JV Co to the non-resident shareholder which may be subject to UK withholding tax. Transfer pricing rules are also likely to be relevant. | Similar issues as for a limited company. |
| Loss relief | Shareholders may, depending on their own tax profile, wish to ensure that they have access to losses incurred by JV Co. In order to achieve this care will have to be taken to ensure that the group relief or consortium relief rules can be utilised. | Whilst losses are directly attributed to the partners/members, there are restrictions on whether these can be utilised as stated above. |
| Exit strategies | Alternative exit strategies for JV shareholders will need to be considered from a tax perspective when the structure is being planned. This will require a full understanding of the type of investor likely to become a shareholder in the JV and the tax profile of the particular investor. | The capital gains tax legislation surrounding the admission/exit of partners/members can be complex. It may be possible to avoid accelerating the tax liabilities of continuing partners but it is strongly recommended that specialist advice is sought in this area. |