There are many different reasons for forming some sort of joint venture, including property investment or development, the operation of a trade, the design of a new product or combining resources to bid for a contract.
Joint ventures can be structured in different ways. These include establishing a joint venture company, establishing a partnership or avoiding any sort of joint venture entity and simply agreeing to work together on a particular project.
Tax issues will need to be considered in relation to the set up of the venture, the operation of the joint venture and the eventual termination of the venture.
This guide outlines the main tax issues that can arise in relation to the three types of joint venture mentioned above.
Types of joint venture
The choice of joint venture structure will depend upon many factors and although the tax treatment is an issue to be considered, the decision is likely to be made for a mixture of reasons and not purely for tax reasons.
Joint venture company
Some advantages of a joint venture company are that it is a separate legal entity so that it is liable in its own right for tax liabilities and other debts. If things go wrong it is more difficult for liabilities to attach to the shareholders in the joint venture. A company is also a universally recognised structure which provides a clear structure for accounting purposes and gives flexibility in raising finance.
A disadvantage of a company is that it is subject to various filing, accounting and other administrative requirements which can add to the cost.
Tax liabilities may arise on the set up of a joint venture company if assets or businesses have to be transferred into the company by any of the shareholders.
The transfer of capital assets into a joint venture company will potentially give rise to a charge to capital gains tax or corporation tax on chargeable gains for the shareholder making the transfer. Depending upon the nature of the assets transferred and the tax position of the shareholder making the transfer, exemptions or reliefs from tax or deferrals of the tax liability may be available.
If the asset transferred into the joint venture company is UK land, a charge to stamp duty land tax could arise for the joint venture company. For more on this see Out-Law's guide to stamp duty land tax. If shares are transferred in stamp duty could become payable by the joint venture company. For more on this see Out-Law's introduction to stamp duty guide.
The transfer could also give rise to a VAT liability. If the asset transferred is a business or a let property it may be treated as a transfer of a going concern for VAT purposes which would mean that VAT would not be payable by the joint venture company. For more on this see Out-Law's guide to VAT on property transactions .
If the joint venture company is to be funded by way of loans from the shareholders, various anti avoidance provisions could prevent the joint venture company obtaining a tax deduction for the interest paid. These include the transfer pricing provisions, which restrict tax reliefs for payments between connected parties to the amount that would have been payable on an arm's length basis. The transfer pricing provisions can apply in relation to loans even if the interest rate is what an independent third party lender would have charged. They can apply if a loan between connected parties exceeds the amount that would have been lent to the joint venture company by an independent third party.
UK corporate shareholders may be able to surrender losses to, or receive surrenders of losses from, the joint venture company, depending on the shareholding structure.
There may also be an obligation on the company to deduct tax from interest paid on loans, especially if the lender is situated outside the UK.
Shareholders could extract profits from a joint venture company by the payment by the joint venture company of dividends, interest or royalties or licence fees. Interest, royalties and licence fees may be tax deductible for the joint venture company, subject to anti avoidance provisions such as the transfer pricing rules. As mentioned above, those rules restrict tax reliefs for payments between connected parties to the amount that would have been payable on an arm's length basis and apply more widely in relation to loans.
If a corporate joint venture is terminated, similar issues to those on set up will arise if assets are transferred out of the joint venture. One way of extracting assets from a joint venture company which saves stamp duty or SDLT is to extract them by way of dividend.
There are three different partnership structures. A traditional partnership could be chosen, a limited partnership or a limited liability partnership or LLP. Traditional or unlimited partnerships established in Scotland have a different treatment to those established in England and Wales.
LLPs are treated as a separate legal entity, whereas limited partnerships and traditional partnerships are not. Both limited partnerships and LLPs offer limited liability, which means that the partners are not automatically liable for the debts of the partnership.
If a joint venture partner transfers a capital asset into the partnership, the transfer will be treated as the disposal by the joint venture partner of a share in the asset in exchange for a share in the assets contributed by the other joint venture partners. This could give rise to a tax liability for the joint venture partner
No stamp duty should arise if shares are transferred in exchange for a share in a partnership. However, if UK land is transferred there will be a charge to stamp duty land tax calculated by reference to the profit share or shares of the partnership that the transferring partner does not own. For instance if a partner has a 30% share in the profits for the partnership it will be subject to stamp duty land tax in respect of 70% of the value of the land it transfers into the partnership. For more on this see Out-Law's guide to stamp duty land tax.
Partnerships are transparent for tax purposes. This means that the partnership itself does not pay tax on its profits. Instead each partner is liable for tax on its share of the profits. There is no joint liability for the tax liabilities of other partners.
For capital gains purposes each partner is treated as owning the share of each of the capital assets of the partnership that corresponds to its interest in the partnership. If the partnership disposes of a capital asset each partner will make a disposal of its share in the asset and will be subject to tax depending upon their personal circumstances.
A change in profit sharing ratios can result in a tax liability for a partner whose share is reduced. However this liability can usually be deferred until the partner ceases to have a share in the partnership.
When a joint venture partnership is ended, the distribution by the partnership of its assets to the partners involves each partner whose share in an asset is reduced disposing of that share for capital gains tax purposes, which may trigger a tax liability. The partner who acquires the asset will be treated as acquiring a greater share in the asset and any gain arising on the disposal by the partnership of the asset which is allocated to the partner who receives the asset will not be treated by HMRC as a chargeable gain but will instead be deducted from the partner's base cost in the asset.
Where UK land is transferred out of the partnership to a partner SDLT will be charged on the person acquiring the land. The rules relating to SDLT and partnerships are complex but SDLT is, broadly, payable on the proportion of the market value of the property that corresponds to the shares of the other partners immediately before the distribution.
When a partnership is terminated the resulting transfer of assets to the partners can sometimes result in VAT liabilities and so the VAT position must be considered carefully.
Contractual joint venture
In a contractual joint venture the parties do not establish any separate entity to carry on the venture. Instead the parties enter into contracts and make their own profits and losses. They pay tax only on their own profits.
Contractual joint ventures are sometimes used by parties to combine resources to bid for the award of a contract or to undertake joint research.
An important advantage of contractual joint ventures is that there is no joint and several liability for the losses of the venture.
As no particular documentation or legal structure is required in order for a partnership to exist, it is important that the parties to a contractual joint venture structure their operations so that they cannot be regarded as acting in partnership. If they are treated as acting in partnership they could be subject to unexpected tax and other liabilities. One of the key indicators of a partnership is profit sharing so contractual joint venturers will need to ensure that the arrangements are structured to avoid this.
A contractual joint venture will not involve the transfer of assets to another entity and so no tax issues should arise on set up or on termination of the arrangements. Also the operation of the joint venture will not involve any sharing of profits so each party will be subject to tax on the profits it makes as a result of the venture.