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Tax influences on choice of joint venture vehicle
Produced in partnership with Andrea Gott
This practice note considers how the principal UK tax aspects of the establishment, operation and termination of a joint venture may impact on the choice between operating a joint venture through a contractual arrangement, a joint venture company (JVCo) or a partnership. It is assumed for the purposes of this note that
the joint venture parties are UK tax resident corporate entities and that any separate joint venture vehicle
established is also UK tax resident. For information on joint ventures with a non-UK tax element see: Tax
implications of international joint ventures.
Types of structure available for a joint venture
A joint venture is a commercial arrangement entered into by two or more independent parties. There are no
specific laws, including tax laws, applicable to joint ventures and no technical legal meaning of the term.
A joint venture will usually take one of the following forms:
o
o
o
contractual arrangement,
partnership (general, limited or limited liability partnership), or
corporate joint venture (JVCo)
The full details of establishing, operating and terminating each type of joint venture are explained in the following notes:
o
o
o
o
o
Tax implications of contractual joint ventures
Tax implications of establishing a joint venture partnership
Tax implications of operating and terminating a joint venture partnership
Tax implications of establishing a joint venture company, and
Tax implications of operating and terminating a joint venture company
This note summarises the principal tax issues and focuses on the impact of the tax issues on the decision of
which structure to choose.
The overarching tax issue that will impact on this choice will always be the tax position of the parties involved. For example, the existence of a capital gain on the transfer of a capital asset into a joint venture
company may be a very significant factor where a tax charge arises on the transferor, but if the transferor (or
another member of its group) has a capital loss that could be used to eliminate that tax charge, the issue
ceases to have significance on the choice.
It is also worth noting that although tax will be a factor in determining the legal form of a joint venture, it will
not usually be the decisive factor. The parties' commercial objectives and the corporate law aspects of each
of the available legal structures are commonly of greatest significance and should always be considered.
For further information on the corporate aspects of setting up a joint venture see: Setting up a joint venture-initial considerations and Setting up a joint venture--choice of structure (a subscription to LexisPSL Corporate will be required).
Establishing the joint venture
The tax issues on establishment that influence the choice of joint venture vehicle largely relate to:
o
contribution of:
◦
capital assets
◦
non-capital assets
◦
land, and
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◦
o
shares, and
VAT
These areas are explored below for each relevant type of joint venture vehicle.
Contribution of capital assets to the joint venture
The tax issues that are relevant on the contribution of assets to a joint venture are:
o
in a contractual joint venture:
◦
establishment of the venture does not usually involve the transfer of any assets by the
parties, and
◦
therefore, the usual tax consequences associated with the disposal of assets do not
arise
o
in a partnership joint venture, the contribution of a capital asset by a partner:
◦
will be treated as the disposal by that partner of a share in that asset (ie a part disposal)
equal to the proportion of the asset the partner is no longer entitled to, and
◦
o
References:
CG27900
may give rise to corporation tax on chargeable gains for the transferring partner, depending on its base cost and the consideration received
in a JVCo the transfer of capital assets to a JVCo:
◦
will be treated as a disposal of the whole of the asset by the transferor, and
◦
may give rise to a chargeable gain subject to corporation tax for the transferring party
where the consideration provided exceeds the base cost of the asset, where the consideration is classified as:
‣
the amount of consideration given by the JVCo, ie cash given or, if shares in
JVCo are received in consideration, the open market value of those shares, or
‣
References:
TCGA 1992, ss 17-18 and 286
if the transferor joint venture party is 'connected' with the JVCo because it has direct or indirect control over the JVCo's affairs, the market value of the asset transferred (if different from the actual consideration)
References:
CTA 2010, ss 450-451
A number of possible reliefs are available for companies transferring assets into either a joint venture partnership or a JVCo, as explained in:
o
o
Tax implications of establishing a joint venture partnership -- establishing the partnership, and
Tax implications of establishing a joint venture company -- Tax charges for the joint venture
parties on the transfer of assets to the JVCo
The availability of these reliefs will depend entirely on the parties involved and the types of assets being
transferred.
Where no reliefs are available and a chargeable gain is likely to arise on the transfer of an asset, a partnership structure may be more appealing to the transferring party because the gain only arises on the part of the
asset disposed of, rather than the whole of the asset.
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Contribution of non-capital assets and assets previously qualifying for capital allowances
o
in a partnership joint venture:
◦
the contribution of non-capital assets may give rise to tax charges for the transferring
partner in the form of income profits subject to corporation tax, and
◦
References:
CTA 2009, ss 156-161
CTA 2009, Part 8
the transfer of a capital asset that has previously qualified for capital allowances may
give rise to a balancing charge, taxed on the transferor partner as trading income, if the
consideration allocated to that asset exceeds its tax written down value
References:
CAA 2001, ss 55-56
o
in a JVCo:
◦
the contribution of non-capital assets may give rise to tax charges for the transferring
party in the form of income profits subject to corporation tax, and
◦
References:
CTA 2009, s 162-171
CTA 2009, Part 8
the transfer of a capital asset that has previously qualified for capital allowances may
give rise to a balancing charge if the consideration allocated to that asset exceeds its tax
written down value
References:
CAA 2001, ss 55-56
A number of possible reliefs are available for companies transferring assets into either a joint venture partnership or a JVCo, as explained in:
o
o
Tax implications of establishing a joint venture partnership -- establishing the partnership, and
Tax implications of establishing a joint venture company -- Tax charges for the joint venture
parties on the transfer of assets to the JVCo
The availability of these reliefs will depend entirely on the parties involved and the types of assets being
transferred.
Where no reliefs are available and income profits are likely to arise, there is generally little to distinguish between a partnership structure and a corporate joint venture with regard to such assets.
Contribution of land
o
in a partnership joint venture:
◦
stamp duty land tax (SDLT) of up to 4% is payable, based on the market value of the
land and calculated by reference to the income profit share of the partnership that the
transferring partner does not own, and
◦
References:
FA 2003, Sch 15, part 3, paras 10-12
it is unlikely that the criteria for reliefs from SDLT will be met in a typical partnership joint
venture
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References:
FA 2003, Sch 15, part 3, para 25(2)
o
in a JVCo:
◦
SDLT of up to 4% is payable, based on either the consideration paid or the market value
of the land if the transferor and the JVCo are connected, and
◦
References:
FA 2003, Part 4
FA 2003, s 53
it is unlikely that the criteria for reliefs from SDLT will be met in a typical corporate joint
venture
References:
FA 2003, Sch 7, Part 1
In the absence of any reliefs, and given the differences in the calculation of SDLT in each type of structure,
the parties will need to consider the circumstances of each case and determine the amount of SDLT payable
in each scenario in order to determine whether one structure is more advantageous than the other.
Contribution of shares
o
o
in a partnership joint venture no stamp duty should be payable if shares are transferred to a
partnership in consideration for a share in the partnership
in a JVco stamp duty at the rate of 0.5% of the consideration paid will be payable by the JVCo.
Relief from stamp duty is not common in a typical joint venture scenario
References:
FA 1999, Sch 13, part I
SA 1891, ss 6 and 55
A partnership structure is likely to be more appealing from a stamp duty perspective in the absence of reliefs
on the transfer of shares to a JVCo.
VAT
o
in a contractual joint venture:
◦
as there is no separate venture vehicle, each joint venture party should consider its own
business in order to determine whether it is required to register for VAT and to account
for VAT on any supplies it makes during the course of the venture
o
in a partnership joint venture:
◦
VAT registration will vary according to the type of partnership used
◦
the contribution of assets by a partner to the partnership may give rise to VAT, depending on the nature of the supply and any available exemptions or reliefs (for example, relief for the transfer of a going concern), and
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References:
HMRC Business Brief 21/04
VATA 1994, s 4
SI 1995/1268, art 5
unlimited and limited partnerships are not bodies corporate and therefore are not eligible
to join a VAT group in their own right (though their members may be eligible if they satisfy the relevant criteria). LLPs are bodies corporate for these purposes and may join a
VAT group if all relevant tests are fulfilled
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References:
VATA 1994, ss 43-43AA
SI 2004/1931
VAT notice 700/2, para 1.3
o
in a JVCo:
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as a separate entity, a JVCo registers for VAT in its own right
◦
the contribution of assets to a JVCo may give rise to VAT, depending on the nature of
the supply and any available exemptions or reliefs (eg relief for the transfer of a going
concern), and
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References:
VATA 1994, s 4
SI 1995/1268, art 5
it may be possible for a joint venture party and the JVCo to be members of the same
VAT group. However, in the case of VAT groups with an annual turnover exceeding
£10m, anti-avoidance provisions mean that VAT grouping in a typical joint venture context is unlikely
References:
VATA 1994, s 43-43AA
CA 2006, s 1159
SI 2004/1931
From a VAT perspective there is little to differentiate between a partnership and a corporate joint venture. If
VAT grouping is important to the parties, a JVCo or LLP may be the most appropriate choice, although a typical joint venture vehicle which is required to meet the VAT grouping anti-avoidance provisions is unlikely to
satisfy the relevant conditions for grouping.
Operating the joint venture
The tax issues in operating the joint venture that influence the choice of joint venture vehicle largely relate to:
o
o
o
o
the taxation of trading profits and losses
the taxation of capital gains and losses
funding the joint venture vehicle, and
tax administration
These areas are explored below for each relevant type of joint venture vehicle.
Taxation of trading profits and losses
o
in a contractual joint venture:
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each party:
‣
is liable for corporation tax on its own share of the joint venture's profits and losses in respect of its own participation in the venture. The rate payable is either
20% (the small profits rate for 2012/13 applicable to companies with profits up to
£300,000) or 24% (the main rate of corporation tax for 2012/13, reducing to 23%
from 1 April 2013, 21% from 1 April 2014 and 20% from 1 April 2015)
‣
References:
FA 2012, ss 5-6
bears its own costs and therefore claims its own revenue expenditure as a deduction in computing its chargeable profits, and
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‣
◦
o
claims capital allowances in respect of the qualifying expenditure of its own business
there is only one 'layer' of taxation--at the level of the joint venture parties
in a partnership joint venture:
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trading profits are taxed in the hands of the partners, allocated according to the agreed
profit sharing arrangements, rather than being assessed on the partnership itself
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◦
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References:
CTA 2009, ss 1258, 1273
rates of corporation tax for the partners are as they are for corporate parties to a contractual joint venture set out above)
References:
FA 2012, ss 5-6
there is only one 'layer' of taxation--at the level of the partners, and
a partner's share of partnership losses cannot be set off against any trading profits that a
partner may have from a different business
References:
CTA 2009, ss 262(1), (2), (4), 1265
o
in a JVCo:
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profits will accrue to and be taxable in the hands of the JVCo itself
◦
rates of corporation tax for the JVCo are as for corporate parties to a contractual or partnership joint venture--as set out above )
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References:
FA 2012, ss 5-6
profits are commonly extracted from a JVCo by way of dividends. Dividends are technically subject to corporation tax in the hands of the joint venture party shareholders, giving rise to two 'layers' of taxation. However, in general terms (unless certain antiavoidance provisions apply), dividends paid by the JVCo to its corporate shareholders
will be exempt from corporation tax on the basis of the availability of broad exemptions,
and
References:
CTA 2009, Part 9A
losses generated by the JVCo can be used by the JVCo itself and/or can be set against
a shareholder's profits from any other business provided that shareholder is grouped
with the JVCo for loss relief purposes. Although a 75% loss relief group is not common
in a corporate joint venture scenario, loss relief via a consortium relief grouping (requiring less than a 75% shareholding relationship) is common
References:
CTA 2010, s 152-153
In the case of a profitable joint venture, although there are technically two 'layers' of taxation associated with
a corporate joint venture, this should not generally give rise to any greater taxation than the single layer of
taxation in a contractual or partnership joint venture, on the assumption that the broad exemptions for dividends are available.
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However, if a joint venture party is a non-taxable entity, such as a pension fund, it is likely that a JVCo structure would be undesirable as this would create an unnecessary layer of tax, at the JVCo level, which would
not exist in other structures.
The fact that a JVCo has a separate legal personality from its shareholders for tax purposes does, however,
provide advantages in tax planning by allowing the parties to determine when a distribution of profits to them
is most tax effective.
However, a partnership also offers flexibility in the partners' profit sharing arrangements (as well as those
applying to trading losses and capital gains/losses). The partners have the freedom to decide to share income and gains in whatever proportions they like, recording the arrangements in the partnership agreement.
Although this may be achieved in a JVCo by the use of different types of shares with different rights, this
would be significantly more complex to establish and operate.
If the joint venture is expected to generate losses which the parties wish to use, a contractual or partnership
structure would allow such losses to accrue directly to the parties. However, provided consortium relief is
available in a corporate joint venture (which is usually the case), this type of structure may be preferred as
losses surrendered to a shareholder may be set off against total profits of that shareholder, rather than being
restricted to profits of the same joint venture trade as they would be in a partnership structure. This is usually
more useful to the shareholder.
If the venture is expected to make initial losses and then become profitable, a JVCo structure may be more
advantageous because of the combined effect of consortium relief (the parties may take the benefit of the
losses when they are generated) and the ability to choose to distribute profits when it is most tax effective for
them.
Taxation of capital gains and losses
o
in a contractual joint venture:
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each of the parties is liable for tax and relief on its own capital gains and losses in respect of its own participation in the venture
o
in a partnership joint venture:
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partnership gains and losses are directly taxable on the partners
o
◦
References:
TCGA 1992, ss 59-59A
partners are treated, for the purposes of capital gains, as owning a fractional share of
each of the capital assets of the partnership corresponding to that partner's interest in
the partnership, and
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References:
SP D12, Introduction--para 2, CG27170
on disposal of a capital asset by the partnership, each of the partners will be treated as
disposing of its fractional share of that asset and will be subject to tax on gains or relief
for losses according to its own circumstances
in a JVCo:
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capital gains and losses accrue to the JVCo itself, which is subject to corporation tax on
capital gains and may obtain relief for capital losses in its own right in the usual way, and
◦
dividends extracted from the JVCo (to pass on any cash generated by the capital disposal) are technically taxable, creating a second possible 'layer' of taxation at the shareholder level. However, broad exemptions are available and in general terms dividends
paid by the JVCo to its corporate shareholders will be exempt from corporation tax (unless certain anti-avoidance provisions apply)
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As with the taxation of trading profits, the double layer of taxation in a JVCo structure should not create any
additional tax in comparison with the alternative structures available, on the assumption that the broad dividend exemptions are available.
If the joint venture is expected to generate capital losses which the parties wish to use, a contractual or partnership joint venture, where the losses accrue directly to the parties, may be most appropriate. In a JVCo
structure, capital losses may not be surrendered by consortium relief, although it may be possible to reallocate capital losses to another group member if a 75% group relief group exists.
References:
TCGA 1992, s 171A
Funding the joint venture
o
in a contractual joint venture:
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the funding of an independent joint venture vehicle is not relevant in a contractual arrangement. Each party bears the costs associated with its own share of the venture's
operations
o
in a partnership joint venture:
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if the partnership is debt funded, the loan relationship represented by the debt is not
brought into the partnership's own corporation tax computation. Instead, it is regarded as
a deemed loan relationship of each partner, so that each partner is required to bring its
share of the debits arising on the partnership's loan relationships into account in computing its own loan relationship profits
◦
References:
CTA 2009, ss 380-381
where the partnership has borrowed from one of its partners, that partner is also required to bring into account credits in respect of the interest receivable on the loan (special rules may apply if the partner is 'connected' with the partnership), and
◦
References:
CTA 2009, ss 348(6) and 383(5)
yearly interest paid by the partnership to a partner may be subject to withholding tax (at
20%), although if the partners are UK tax resident, the UK to UK exemption from withholding should be available
References:
ITA 2007, s 874
FA 2012, s 1
ITA 2007, ss 930 and 933
o
in a JVCo:
◦
if the JVCo is debt funded by a joint venture party, then that party and the JVCo will independently bring into account its loan relationship debits (for the JVCo) and credits (for
the lending party) according to its own payments and receipts of interest
◦
References:
CTA 2009, Part 5
special rules may apply where the joint venture party creditor and the JVCo debtor are
'connected', and
References:
CTA 2009, ss 66-67
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◦
yearly interest paid by the JVCo to a joint venture party may be subject to withholding
tax (at 20%), although if the JVCo and the joint venture parties are UK tax resident, the
UK-UK exemption from withholding should be available
References:
ITA 2007, ss 930 and 933
The difference in the manner in which loan relationship debits are brought into account in a partnership and
corporate structure (ie directly for the partners in the former and for the JVCo in the latter) is unlikely to have
a significant impact on the decision as to which structure to adopt, although the venture parties should be
made aware of the distinction in order to assess their own particular circumstances.
Tax administration
o
in a contractual joint venture:
◦
each party is required to prepare its own corporation tax return, including its own share
of trading profits and losses, in respect of its own participation in the venture
References:
FA 1998, Sch 18, parts I-II, paras 1-20
o
in a partnership joint venture:
◦
the partnership is required to file a partnership tax return on behalf of all its partners,
showing the profits of the partnership and the profit-sharing arrangement, and
◦
References:
CTA 2009, Part 17
each partner is also obliged to complete its own corporation tax return and pay corporation tax on the chargeable profits of its own business, including its share of the partnership's chargeable profits
References:
TMA 1970, s 12AA
o
in a JVCo:
◦
as an independent entity, the JVCo is required to prepare its own corporation tax return,
and
◦
References:
FA 1998, Sch 18, parts I-II, paras 1-20
the JVCo shareholders are additionally required to prepare their own returns, incorporating any taxable profits extracted from the JVCo
Tax administration for a contractual joint venture is the simplest of all the three structures, but this is unlikely
of itself to cause the parties to choose this form over any other.
Terminating the joint venture
o
in a contractual joint venture:
◦
termination of the venture will not usually involve the disposal of any assets to or by the
joint venture parties, and
◦
if termination of the venture leads to termination of the trade of a joint venture party, the
usual tax consequences of termination of trade will apply independently to that party's
trade
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o
in a partnership joint venture:
◦
distribution of an asset on dissolution of the partnership may give rise to corporation tax
on chargeable gains for a partner on its fractional share of the asset
◦
References:
SP D12, para 2, CG27170
a partner in receipt of an asset on dissolution of the partnership is not regarded by
HMRC as disposing of its fractional share in that asset. Instead, any potential chargeable gain is deferred by deducting it from the partner's base cost in the asset
◦
References:
SP D12, para 3, CG27170
the distribution of shares by the partnership on termination should not give rise to stamp
duty
the transfer of land to a partner is a chargeable transaction for SDLT purposes
◦
◦
◦
References:
FA 2003, Sch 15, Part 3, para 18-24
the transfer of partnership assets may also give rise to VAT (considered further in
HMRC's Business Brief 21/04), and
References:
HMRC Business Brief 21/04, para (vii)
if termination comprises the transfer by a partner of his partnership interest, the VAT
treatment of such a transfer will be dependent on whether the holding of that partner's
interest is regarded as an economic activity
References:
HMRC Business Brief 30/04--VAT and partnership shares
o
in a JVCo:
◦
if termination takes the form of disposal of JVCo shares:
References:
TCGA 1992, Sch 7AC
‣
the transferring party may be subject to corporation tax on chargeable gains if the
disposal is for a consideration in excess of base cost, although it may be possible
to exempt any such gain if the substantial shareholdings exemption is available,
and
‣
care should be taken as to the potential application of degrouping charges if the
JVCo has been a member of any tax grouping during operation of the venture
◦
if the JVCo disposes of assets, the normal consequences of sale will apply, including
(and subject to reliefs):
‣
capital assets disposed of for a consideration in excess of their base cost may
give rise to a chargeable gain subject to corporation tax
‣
certain non-capital assets disposed of, including intangible assets and trading
stock, may give rise to income profits subject to corporation tax, and
‣
certain assets disposed of may give rise to a VAT charge, unless the transfer
constitutes a TOGC or an exemption is potentially available
◦
if the assets are disposed of to a joint venture party rather than a third party, the disposal
may be deemed to take place at market value if the JVCo and the transferee party are
connected
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References:
TCGA 1992, ss 17-18
A contractual joint venture is the simplest structure from a tax perspective to terminate due to the absence of
a separate venture vehicle. It is likely that the termination of both a partnership and corporate structure would
give rise to tax charges, but the extent of such charges, and therefore their significance in the choice of venture structure, will depend on the exact form of the termination and the assets (if any) to be disposed of.
Last updated on 7 March 2013