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Annual Investment Allowance claims by PE-backed portfolio companies – care needed

15 December 2021

Private equity groups reviewing corporation tax returns for their portfolio companies should take particular care over Annual Investment Allowance (AIA) claims.

A group of companies must share a single AIA between the UK members of that group. In addition, groups under common control where the groups are ‘related to each other’ must also share a single AIA between them. Groups can either be related to each other through the ‘shared premises condition’ or the ‘similar activities condition’. While the shared premises condition may be unlikely to apply to PE-backed portfolio groups, the shared activities condition is much more likely to be met.

Are you related?

A group of companies is related to another group of companies if a company which is a member of one group is related to a company which is a member of the other group. It is typical in PE-backed groups for there to be a ‘bidco’ which provides management services to its subsidiaries. HMRC’s view is that the bidcos in two otherwise unrelated portfolio groups under the control of the same PE house will be sufficient for those groups to be related for AIA purposes. Therefore, where two entirely separate groups with entirely different trades/activities are under common control, and both include a bidco undertaking management services, HMRC will regard these groups as one group for AIA purposes, and only allow one claim between them.

Groups under common control for these purposes will likely include all portfolio groups containing UK companies in funds controlled by the same general partner (or controlled by general partners that are, in turn, under common control). However, the position will depend on the specific facts and structure of the PE house involved.

Fair shares

As a reminder, the AIA rules currently enable the cost of qualifying expenditure on plant and machinery, up to an annual limit of £1m, to be offset against taxable profits in the year of expenditure. It is this £1m limit that needs to be shared.

PE houses will need to consider how the AIA is to be allocated across their portfolio. In many cases, this will simply be a pro-rata across the number of portfolio groups they control but there may, of course, be scenarios where different sharing arrangements are beneficial – fortunately, there are no restrictions here and groups can allocate the allowance in any way they see fit.

For further information, or for assistance, please contact Catherine Jones, James Pratt or Jennifer Wall