HMRC issues updated capital allowances guidance for partnerships with corporate partners
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
29 January 2024
Following HMRC’s updated guidance, we review the capital allowances rules for partnerships with corporate partners.
For some time, there have been special rules in terms of the capital allowances available to partnerships with a corporate partner.
Annual investment allowance (AIA) explained
Since it was introduced in 2008, annual investment allowance (AIA) has only been available on qualifying expenditure by qualifying persons, subject to the £1m annual limit which may need to be shared by connected businesses under common control.
Section 38B of the Capital Allowances Act 2001 (CAA 2001) outlines the key AIA exclusions, with the most common examples being expenditure on cars and expenditure in the final period of a business operations. To qualify for AIA, Section 38A CAA 2001 stipulates that the business incurring the expenditure must be an individual, company or a partnership comprising entirely of individuals. Partnerships with a company or a trust as a partner are not entitled to AIA.
Super-deduction and full expensing
HMRC has recently clarified its guidance on the availability of the super-deduction (expenditure up to 31 March 2023) and full expensing (expenditure from 1 April 2023 onwards) for partnerships.
Section 9 Finance Act 2021 (super-deduction) and Section 7 Finance (No. 2) Act 2023 (full expensing) requires the expenditure to be incurred by a company within the charge to corporation tax. The application of this to partnerships is explained in the HMRC capital allowances manuals CA11145 and CA23163.
Where a partnership comprises entirely of individuals, no super-deduction (expenditure up to 31 March 2023) or full expensing (expenditure from 1 April 2023 onwards) is available. However, the partnership will be able to claim AIA up to the £1m annual limit as above on qualifying expenditure.
Section 1259 of the Corporation Tax Act 2009 (CTA 2009) states that the taxable profits of a partnership, where the members include a company within the charge to corporation tax, are calculated under the corporation tax rules. This means that such partnerships are effectively treated as a ‘notional company’. A partnership which only has companies as members is able to claim the capital allowances super-deduction (expenditure up to 31 March 2023) and full expensing (expenditure from 1 April 2023 onwards), subject to the other criteria being met. If the expenditure does not qualify for super-deduction or full expensing, no AIA would be available as the partnership isn’t comprised entirely of individuals.
For a partnership with some members within the charge to income tax and some within the charge to corporation tax, it may be necessary for the partnership to submit more than one computation. One in respect of the individual members who are subject to income tax and the other in respect of company members who are subject to corporation tax. The corporate partners will be able to benefit from super-deduction and full expensing based on their proportion of the partnership profits. Once again, if the expenditure does not qualify for super-deduction or full expensing, no AIA would be available as the partnership does not comprise entirely of individuals.
In summary, the capital allowances available to a partnership will depend on whether the partnership is based entirely of individuals. Those partnerships which will benefit from AIA, but will have no entitlement to super-deduction or full expensing. Those including a member within the charge to corporation tax may benefit for super-deduction or expensing, but only if the expenditure otherwise qualifies. Expenditure on second hand assets by a mixed partnership or partnership made up entirely of corporate partners will neither qualify for super-deduction/full expensing or AIA.
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