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Tax advantages of Limited Liability Partnerships under review by HMRC

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Thursday October 24, 2013 at 4:34pm
Trading through a Limited Liability Partnership (LLP) can bring significant advantages, especially where one of the partners is a limited company. Indeed we set up our own Financial Planning business this way. Advantages include reduced rates of National Insurance and greater tax relief on cars. However, some accountants have obviously gone too far for HMRC.

Allocating all profit to corporate partners

One piece of planning was to have a corporate partner of an LLP. All of the LLP’s profits were allocated to the corporate partner which paid tax at 20% and thus avoided higher rates of tax at 40% and 50%. However all of the cash generated by the LLP was drawn out of the partnership by the individual partner as drawings.

Hence the corporate partner had a high capital account in the LLP in the form of profits allocated to it but never actually paid. The individual partner had a massively overdrawn capital account that would never be repaid. Unlike an overdrawn loan account in a limited company which is taxable, an overdrawn capital account in an LLP is not. HMRC stopped this type of aggressive use of capital accounts on 23rd March this year.

Staff members as partners

For companies trading as LLPs already, another way of reducing employers national insurance (currently paid by the employer at 13.8% of salary with no upper limit on earnings) is to make members of staff partners in the LLP. This immediately makes them self-employed rather than employed, thus removing the employers' NI cost.

HMRC are consulting on this with a view to changing matters from April 2014. They are proposing that partners must then pass two tests to gain self-employed status. Firstly, they must work without close supervision or control, which presumably will not be too difficult to achieve. In the second test they must take on some form or risk of ownership. It has been suggested that a variation in earnings by as little as 5% could constitute an employee taking on risk. Again anyone with a variable bonus would probably meet this proposed criteria.

Reallocation of profit in mixed partnerships

A mixed partnership is where you have an LLP with an individual as a partner and also that individual’s company as a corporate partner of the same LLP as discussed above. The present consultation is considering allowing HMRC to dictate the profit share allocated to members of the LLP regardless of what was actually reported. The idea being that if the corporate partner pays tax at 20% thus avoiding tax at 40% on the individual partner, then HMRC can tax the individual partner on the income allocated to the corporate partner even though he or she did not actually receive it.

So the advice for the moment is to wait and see what the revenue looks like in the upcoming autumn statement before rushing ahead with LLP planning at the moment.

Andy Parker
Chartered Accountant and Chartered Financial Planner

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Parker Chartered Accountants and Financial Advisors is the trading name for PLW Advisors Ltd (Registered No. 10396831), and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here