UK loss restriction and General Partner companies
Under the new corporation tax losses rules applying from 1 April 2017 there is a restriction on the level of brought forward losses which can be used by a company within a tax year.
In the context of a UK corporate fund General Partner ‘GP’, these rules operate as follows:
- A company can offset all current year management expenses against all relevant profits
- After this, all profits up to a deductibility allowance of £5m can be offset by brought forward management expenses
- Any taxable profits still remaining can be offset by brought forward management expenses but only be up to a maximum extent of 50% of the profits.
Such GPs typically receive a profit share from the underlying fund and pay a management or advisory fee to another entity in the structure. Both the profit share and the fee are usually accounted for on an accruals basis and the GP typically makes a small profit each year. However, the profit share only becomes taxable when there are fund profits to frank it whereas the fees are deductible on an accruals basis.
The underlying fund usually takes several years to realise its investments and generate profits. These circumstances typically generate excess management expenses in the GP during the early years of the fund’s life which are then carried forward only to be used in later years when profits are made.
The change in law may put such GPs into a taxpaying position merely because the tax treatment of the profit share differs to the accounting treatment.
This issue has been discussed with HMRC but there is currently no governmental appetite for an industry specific legislative exemption or for a concession to treat the GP as if it were a trading company. On this basis, GPs are considering these rules more closely and the following themes are emerging which may point to solutions in many cases:
- Where multiple GPs are within a corporate group or there is a single GP which acts for multiple funds there should be only one £5m allowance. However, sister GP companies owned by an existing parent LLP (and not otherwise in a corporate group) should not be grouped and so each company is entitled to its own £5m allowance.
- The rules also only apply to carried forward losses, so GPs that can offset their expenses on a current year basis are not affected. Allocation of accrued interest on shareholder loans to the GP or replacing the profit share with a fee charged from the fund may eliminate carried forward losses.
- Going forward, some funds are considering offshore GPs due to non-tax considerations such as regulatory and investor uncertainty post Brexit. A non-UK tax resident GP would be outside these rules but the local tax treatment should be considered carefully. In addition, there may be UK corporation tax consequences if there are legacy GP companies which remain UK tax resident.
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