RPDT20610 - The charge to RPDT: joint venture allowance: notional allowance for joint ventures

RPDT20300 explains how the profits of a joint venture company (JV) that do not exceed that company’s own annual allowance are attributable to the JV members with a 10% or greater share in the JV.

FA22/S44 operates to reduce the JV’s own allowance where an amount would be attributable to a member which is not chargeable to RPDT, referred to as an “excluded body”, FA222/S44(9). Because RPDT is based on trading profits for Corporation Tax purposes, an excluded body is therefore one which is treated as a company for tax purposes but is either –

• Outside the scope of Corporation Tax, such as most non-UK companies. Examples would include a non-UK state-owned company that is entitled to Sovereign immunity, such as a Sovereign Wealth Fund or pension fund for that state’s employees, or
• Within the scope of Corporation Tax, but where its trading profits are exempt. For example: a UK pension fund

However, the exempt body is entitled to a “notional allowance” which it may then use to restore the restricted allowance of JVs of which it is a member. This notional allowance is £25m and determined on a financial year (FY) basis. The allowance is to be allocated to the parent of the group of which

the excluded body is a member but another member of that group may be nominated to undertake the allocation. Detail of the allocation process is at RPDT20520.

The allowance restriction only applies where it will actually have an effect on the RPDT of the joint venture. In other words, the fractional interest of an exempt body in the joint venture may mean that a reduction would not make any difference to the JV’s RPDT liability based on its profits for the accounting period.

For example, a JV has one exempt member which holds a 20% interest which would potentially reduce the JV’s annual allowance from £25m to £20m. The restriction would not affect the liability of the JV provided its profits do not exceed that reduced amount. Similarly, a 50% holding by an exempt body will have no effect on the RPDT liability of a JV that makes RPD profits of no more than £12.5m in a full year. If it is clear that by applying section 44 of the Finance Act 22 wouldn’t have any effect on the tax liability then that section of the primary legislation is disapplied under regulation 7 SI 2022/266.

regulation 7 SI 2022/266.

Example

P, the Treasury department of an overseas state, operates pension funds A and B. A and B are immune from UK Corporation Tax.

A holds a 40% share in JV1 which made a RPD profit of £30m while B holds 60% of JV2 which made a RPD profit of £100m and 50% of JV3 with a profit of £20m.

This example assumes that each JV’s accounting period corresponds to the FY, for simplicity.

The proportionate amount of each JV’s RPD profit within their allowance would be attributed to their members as follows: £10m to A (40% of £25m) and £27.5m to B (60% of £25m plus 50% of £20m).

Unless P makes an allocation of notional allowance the allowance available to each JV is reduced according to the percentage shareholdings of A and B. P nominates A to provide an allocation statement and of the £25m notional allowance, £10m is allocated to JV1 and £15m to JV2. These amounts entirely make up the restriction, so each is chargeable to RPDT on its profits in excess of £25m.

No notional allowance remains to be allocated to JV3 therefore its own allowance is reduced to reflect B’s membership share of 50%. JV3’s profit of £20m is below what would be its unrestricted allowance of £25m so the restriction is £10m, leaving £10m of profit chargeable to RPDT.

RPDT01100 contains a general introduction to RPDT and a list of abbreviations used.