Unexpected cost of entering into partnership
Q: My client is an individual who owns 100% of the shares in two trading companies. He and five other individuals, who are all successful entrepreneurs with their own trading companies, have decided to get together to run a pub. I suggested to them that this should be run as a partnership as this would enable them to benefit from business asset taper relief on a future disposal, and if the pub makes a loss they would be able to offset those losses against their other income.
However, someone has told me that operating the pub in a partnership will increase the company tax bill, how can this be?
A: You have hit a familiar problem. Your rationale for suggesting that they use a partnership is reasonable looking at the pub business in isolation.
However, once the individuals become partners in the business they will become associates under section 417(3)(a) ICTA 1988. As a result, any company controlled by your client's partners will be regarded as being associated with any company controlled by your client following section 416 ICTA 1988 and following the rationale set out in the case of R v IRC, ex p Newfields Developments Limited. Section 416(6) (which deals with the attribution of rights and powers) says 'may' not 'shall 'so there is an argument that the partners interests may not necessarily be attributed. However the HMRC manual at CTM60250 includes the statement that ' You should disregard combinations containing superfluous members '. I think this is unlikely to apply in this case so the partners' companies will all be associated.
Despite the advantages you highlight for using a partnership, bearing in mind the impact of bringing together a number of companies as associated companies for small companies relief purposes, the solution could be for the pub to be operated through a limited company owned by the six individuals. On the basis that the shareholdings will be spilt equally your client will not control the company so he still only have two associated companies.
You could consider the individuals owing the pub in joint ownership, as this would maximise the taper position i.e. Business Asset Taper relief would be available. The trade would be operated via a limited company. However, don't forget the Business Property Relief implications.
This situation is a clear example of the necessity of looking at all the angles when deciding on the appropriate business vehicle for any particular situation.