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"a general partner who had not previously recognised an overall profit in any year may now face a tax charge earlier than would otherwise have been the case."

Restrictions on brought forward losses for general partner vehicles - Does offshoring provide the solution?

16 Jan 2019

Despite lobbying from the British Private Equity and Venture Capital Association (BVCA) amongst others, Her Majesty's Treasury (HMT) have recently confirmed that no concessions will be granted to general partner (GP) vehicles in respect of the legislative amendments to UK corporation tax. The amendments came into effect from 1st April 2017 and restrict the amount of brought forward losses that can be used in a tax year.

These changes affect UK tax resident GP companies who have structured their remuneration as a priority profit share. Under such an arrangement a GP will only recognise the income in later years when the fund has sufficient income or capital gains, whilst the running costs and advisory fees are recognised on an accruals basis in each accounting period.

Under the previous legislation such treatment would have allowed vehicles to operate on a tax neutral basis given over the life of the fund no profits would be realised.

There have been lengthy discussions with HMRC lead by the BVCA but it has recently been confirmed that there is no appetite for an industry specific exemption to the legislation, or for a concession to treat a GP as if it were trading.

What is permitted?

Under the revised legislation:

  • A company is permitted to offset all current year expenditure against all relevant profits.
  • Any remaining taxable profits can be offset by brought forward accumulated losses up to a maximum of £5 million.
  • Any remaining taxable profits can be offset by any remaining brought forward accumulated losses up to a maximum of 50% of the profits.

As a result, a general partner who had not previously recognised an overall profit in any year may now face a tax charge earlier than would otherwise have been the case. This is because not all brought forward losses can be used to offset the available profits.

Let’s put this into context:

A company with current year taxable profits and brought forward losses each in the amount of £10,000,000 would face a tax charge of £475,000 in the current year, whereas previously there would have been no resulting taxable profits until future tax years.

Profit for the year

£10,000,000

Less: £5,000,000 accumulated losses

(£5,000,000)

Remaining profit

£5,000,000

Less: 50% of remaining losses

(£2,500,000)

Profit attributable to tax

£2,500,000

Tax at 19%

£475,000


An offshore solution?

Following the confirmation that no concessions will be granted, general partners are considering these rules more closely, with one proposed solution coming from the use of a Jersey tax resident company to act as the general partner. Under Jersey legislation, no tax would currently be charged on any resulting profits given the company would qualify for taxation at the standard rate of 0%.

With over 25 years’ expertise in servicing private equity fund managers, Ocorian's experienced and highly qualified team manage all aspects of the operating and administration of general partner vehicles, ensuring the highest level of corporate governance is maintained at all times and the provision of professional, qualified, Jersey resident directors. Learn more here.