A company and some individuals set up an LLP. Some years later the company paid large amounts to the individuals toacquire their interest in the LLP. The payment was considerably above netasset value and the company made a claim for tax relief for expenditure onacquiring intangibles for the excess. Entitlement to this relief dependson the LLP being “transparent” for tax purposes, in other words that thecompany has to be treated as if it owned its share of the LLP assetsdirectly. On the basis of accounting evidence, the Tax Tribunaldecided that the separate legal personality of an LLP under the LLP Act meantit was not transparent; the LLP was a separate entity for accountingpurposes. As a consequence, the company was denied tax relief for itssizeable expenditure on goodwill.
When the UK introduced limited liability partnerships (LLPs)special provisions (then s118ZA ICTA 1988) were added to the Taxes Acts suchthat for tax purposes LLPs are treated as if they are partnerships. Inthis case it was held these rules were not relevant as the relief usedaccounting rules in testing what was eligible capital expenditure. Thecorporate member of the LLP lost its claim for intangibles relief due to the intangiblefixed asset rules requirement that the expenditure has to result in the companyhaving an intangible fixed asset in its UK GAAP balance sheet. TheUK GAAP entity accounts accounted for the expenditure as “investment insubsidiary”. The company asserted it could adjust these accounts byinvoking the provisions in the Taxes Act aligning LLPs and partnerships fortax. However the Tribunal ruled that these provisions only apply fortax. The requirement that the expenditure resulted in an intangiblefixed asset in its balance sheet – which is an accounting requirement – cannotnot be altered by a provision that applies for tax purposes only. Paragraph76(3) Schedule 29 FA 2002 specifically excludes an asset which represents apartner’s interest in a partnership from qualifying from relief unless theaccounting treatment is such that thepartnership interest represents intangible assets (para 76(3)). As the assets of the LLP were not the assetsof the company, the company had to show its investment in the LLP as aninvestment in a subsidiary. Thus, therequirements of para 76(3) were not met and the claim failed.
The Tax Tribunal commented that had the activity been in anordinary partnership with company participating as a partner in precisely thesame way as it had participated as a member of the LLP, the company would havehad entitlement to tax relief on its expenditure. The accountingevidence was that the cost of acquiring an interest in a partnership would beaccounted as if the partnership interest was a branch of the company – thecompany would be treated as if it owned the appropriate share of each assetdirectly.
This distinction may be an important consideration instructuring interests, subject to other commercial considerations.