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Capital allowances continue to be a very valuable form of tax relief for businesses and now the rules relating to how claims can be made for mixed partnerships have been clarified. This latest guidance was released in January 2024.
A partnership’s profits are calculated in accordance with the tax rules applying to its members. These are as follows:
Where the partners are all individuals - profits are calculated under income tax rules as if the partnership is an individual and each partner pays tax on their partnership profit share according to their levels of income;
Where the partners are all companies - profits are calculated under the corporation tax rules as if the partnership is a company and tax is be payable by the corporate partners based on their partnership profit share at 25% where company profits exceed £50,000.
Where the membership of the partnership is mixed, combining individuals and companies, two calculations must be prepared. One for the individual partners and one for the corporate partners.
There are certain capital allowances that can only be claimed by companies, and not by other forms of business such as sole traders, partnerships, and LLPs. These capital allowances could not be claimed when calculating profits chargeable to corporate members of partnerships or LLPs. The clarification issued by HMRC states that it is now possible for mixed partnerships, i.e. those which involve a corporate and an individual partner, to claim the same full or enhanced capital allowances as companies.
Previously there have been different levels of capital allowances available, depending on tax status. In partnerships where the members are subject to income tax, the position is relatively straightforward; capital allowances can be claimed as a deduction against income and shared among the partners according to their profit-sharing arrangements. In the past these partnerships were not entitled to the enhanced levels of capital allowances available to corporates.
Where all the members of a partnership are corporates and subject to corporation tax, the enhanced levels of capital allowances, such as full expensing, can be claimed.
In a mixed partnership, where one or more of the partners is a corporate entity which is subject to corporation tax and other partners are individuals who are subject to income tax, eligibility for capital allowances has been a difficult area and it could be confusing to understand how capital allowances should be dealt with.
This new clarification is very welcome. HMRC has now confirmed that in a mixed partnership scenario, in determining the profits chargeable on corporate members (but not on individual members), claims can be made for capital allowances that are available only to companies, such as the 130% super deduction and full expensing. However it is important to note that partnerships having any corporate members remain unable to claim the annual investment allowance (AIA).
If you would like help with partnership tax, please contact us via partners@rjp.co.uk.
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