Intangible Assets Deduction Not Available to LLP Members

Where a partnership's members include one or more companies, the profits of the partnership are calculated as if its trade was carried on by a company, by virtue of Section 1259 of the Corporation Tax Act 2009. Recently, the Upper Tribunal (UT) ruled on whether, in such cases, deductions relating to the amortisation of intangible assets are capable of being disallowed under the 'related party' provisions in Part 8 of the Act.

Three companies had transferred their trades to a limited liability partnership (LLP). Corporation Tax (CT) deductions were claimed for amortisation of intangible assets that had been transferred. After HM Revenue and Customs refused the deductions on the basis that the companies and the LLP were related parties, they appealed to the First-tier Tribunal (FTT), claiming that the calculation of the notional company's profits required by Section 1259 did not refer to its ownership characteristics.

The FTT concluded that the notional company was a statutory fiction that represented the partnership carrying on the trade. The application of the related party rules was part of the calculation of profits, and the notional company should be treated as having the ownership characteristics of the partnership. The deductions were therefore not available.

The LLP and the three companies made a further appeal to the UT on the grounds that the FTT had erred in its analysis. They argued that Section 1259 was a freestanding provision and there was nothing in the statutory wording to support the assumption that the notional company's ownership matched that of the partnership.

The UT noted that Section 1259 does not address the specifics of how profits and losses are to be calculated. To do so it is necessary to consider other provisions in the Act, including those in respect of intangible assets and the related party exception. The absence of specific wording treating the notional company as having the ownership characteristics of the partnership did not mean that the exception was somehow incapable of applying. Checking whether deductions for amortisation of intangibles were precluded by the exception was just as much a part of the profit calculation as the subtraction of the amortised amount. The appeal was dismissed.

The FTT had gone on to find that, in respect of accounting periods commencing on or after 25 November 2015, the companies and the LLP would in any case have been considered related parties under the extended definition in the Finance Act 2016. CT is an annual tax, and whether an expense is deductible must be considered in the year it arises. The extended definition therefore applied in those accounting periods even though the intangible assets had been transferred before 25 November 2015. The UT noted that, had it been necessary to decide the point, it would have agreed with the FTT's conclusion.