Finance Act 2015 introduced anti-avoidance measures which were aimed at countering perceived abuse of the ‘joint venture rules’. Before these rules, groups of management could set up a holding company owning 25% of a main trading company and provided they met the ER qualifying requirements for the holding company then they would benefit from ER. Although Finance Act 2015 successfully countered this sort of arrangement it went too far by also disregarding a corporate entity’s joint venture interest or interest in a partnership. This meant that shareholders of companies which traded alongside other companies (in a joint venture) could be denied ER status.
It was never the intention to deny ER to shareholders of companies that were only ‘guilty’ of not trading completely in their own right (but through a partnership). The real intention was to prevent shareholders who did not have a stake in at least 5% of the business from benefitting from ER. New rules are to be brought in (to be effective from 18 March 2015) to achieve this objective.
John held 5% of the shares in a trading company which in turn was a 50% member of a trading partnership. Under the pre Finance Act 2015 rules any disposal of this company would have benefitted from ER but Finance Act 2015 rules have the effect of disregarding the partnership interest and therefore no ER would be available. The new rules do not help here either as John only had a 2.5% interest in the partnership (through his shareholding), however the new rules would help if John had a 10% shareholding.
The new rules do not represent a complete U-Turn to the Finance Act 2015 because in many cases shareholders will still be denied ER. Shareholders will still want to review the ER implications of entering into a JV. Helpfully, the ER rules only need to apply in the year up to disposal and this means that the impact of JVs will be limited to the extent that they are wound down over a year before any disposal takes place.
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