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Capital allowances rules updated for partnerships

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Following clarification of the rules relating to capital allowances claims in mixed partnerships, partnerships with corporate partners are now eligible for full expensing and super-deduction.

7th Feb 2024
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Changes to the capital allowances rules mean that partnerships with corporate partners are now eligible to claim capital allowances including first-year allowances such as full expensing and the super-deduction.

On 24 January 2024, HMRC issued updated guidance and clarification on the availability of capital allowances in mixed partnership scenarios in the HMRC Capital Allowances Manual at CA11145. 

Certain types of capital allowances such as the 130% super-deduction, 100% full expensing for items of main pool plant and machinery and the 50% first-year allowance for special rate pool plant and machinery, are only available to corporate entities. 

Capital allowances levels

In partnerships where all 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. However, such partnerships are not entitled to the enhanced levels of capital allowances available to corporates.

In partnerships where all members are subject to corporation tax (in other words, corporate partnerships), again the arrangements are relatively straightforward but, in this scenario, the accelerated levels of capital allowances, such as full expensing, can be claimed.

The issue was more complicated in mixed partnerships where one or more of the partners was a corporate entity subject to corporation tax and other partners were subject to income tax. At the partnership level, it was unclear when preparing the tax computation for the partnership, how capital allowances should be dealt with. Notionally, the corporate entity within the partnership could avail of the enhanced levels of capital allowances, whereas the partner subject to income tax could not. 

Notional company

CTA09/S1259 states that the profits of a partnership in relation to its corporate members, are computed as if the partnership were a company chargeable to corporation tax, in other words a “notional company”. HMRC has now clarified that in computing the profits of such a notional company in a mixed partnership scenario, the corporate entity should be able to avail of the enhanced levels of capital allowances.

CA11145 now states that “before the partnership profits are allocated to the members, it may be necessary for the partnership to submit more than one computation, for example one in respect of individual members who are subject to income tax and one in respect of company members who are subject to corporation tax. As with the corporate partnership above, the computation for the ‘notional company’ can include a claim to capital allowances that are only available to companies within the charge to corporation tax. In this way, partnership members within the charge to corporation tax may obtain the benefit of first-year allowances such as full expensing or the super-deduction (which partnership members within the charge to income tax are unable to access).”

This approach is consistent with HMRC’s partnership manual at PM211200, which advises that “care should be taken to ensure that, where any relief that is available to companies but not to individuals is in point, only the amount of relief that is properly attributable to company members is claimed”. So, for example, a mixed partnership cannot claim the annual investment allowance in computing the profits of the mixed partnership because it is not a “qualifying person” – namely, an individual, a partnership of which all the members are individuals, or a company.

Welcome clarification 

We consider that this is a welcome clarification of the rules. Corporate entities are members of mixed partnerships for a variety of reasons. It is entirely appropriate that they should be able to avail of investment incentives such as the super-deduction, full expensing and the 50% first-year allowance in the same way that they would if they were to sit outside that mixed partnership wrapper. This helps ensure that the mixed partnership continues to invest in capital projects.

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By richard thomas
08th Feb 2024 10:36

The "Changes to the capital allowances rules" you refer to in the first sentence had passed me by, so before reading on I thought I would look them up. I have looked at Finance (No. 2) Act 2023 and can see nothing in sections 7 to 9 (capital allowances) showing any change in the law.

So reading on I find that there is no change in the rules, but simply HMRC "guidance and clarification" of the existing law. While CA 11145 may be guidance, it is not a "clarification".

Existing law has been there since no later than 1988 (s 114 ICTA 88) and it doesn't need clarification, as it is well understood by those who have to advise or deal with mixed partnerships. To puff it up to the extent you have done in the penultimate paragraph of the article is rather ridiculous

What HMRC has done, no doubt following prompting from interested parties, is to put some guidance into CA to expand on and supplement what was in PM211100 and 211200. Hardly newsworthy for the average AWeb reader.

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Replying to richard thomas:
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By kevinringer
08th Feb 2024 11:33

It is news to me. But I do live under a stone.

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