Limited Liability Partnerships and tax

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In my article Limited Liability Partnerships – the basics I explained about LLPs. Here I am going to go into some of the nitty-gritty of the tax implications.

First off a refresher – a normal partnership leaves each partner exposed without financial limit should things go wrong.  The only debt for which a partner cannot be bankrupted is the tax debt on another partner’s share of profits.  In a Limited Liability Partnership the protection is expanded and each partner can only lose their investment in the business – and no more.

Currently each partner in a partnership pays tax only on their share of the partnership profits.  Nothing changes about this if an LLP is formed – whether as a new business or a conversion from an old partnership.

Thinking of changing your partnership to an LLP? The tax situation is very sympathetic – so long as the business after the change is substantially the same as the one before.  Providing it is the same business then HMRC will tax the partnerships as if there had been no change.  The old one will not be treated as having ceased and the ‘new’ one will not be subject to the start-up rules for taxing businesses.

This continuity where the business is unchanged is very helpful.  It allows partnerships to convert without concern for the tax changes.

Sometimes people when changing the form of their business will decide to hive off part.  For example they might have a PR and marketing business, and plan after the change to have one business specialising in PR and another only in marketing.  In this case the HMRC rules mean the old business will be taxed as having ceased and two new ones commenced.

If you are going to change a partnership into an LLP then as a general rule it is probably best to do this at your year-end.  If however you change mid-year then HMRC will accept just one Partnership Tax Return covering the two bits of the year.  For the year of change only, a single PAYE Return for your employees will also suffice.  After that you will need to have the LLP registered with HMRC as the employer. Remember it is a separate legal identity.

Employees’ rights will remain as if their start date was the date they first worked with the old business. Losses made by a trading LLP may be somewhat less valuable to the members.  In an old partnership they could set those losses against other income and receive a tax rebate.  In a trading LLP there are limits to the losses which can be set against outside income.  Broadly they are limited to the amount of the partner’s investment in the LLP.  This is a complex area and one to discuss with your accountant.  The partner will however always be able to set their share of the partnership loss against future profits from the same partnership.
Curiously partnership losses made by professions (as opposed to trades) do not suffer the same restrictions on relief against outside income.

Stamp Duty might be a worry for the most financially astute of readers – where a large business is being converted to an LLP.  There is no Stamp Duty Land Tax payable if certain conditions are met.  Take specific advice from your accountant and solicitor about Stamp Duty Land Tax if passing land or goodwill to an LLP.

In essence my message today is that forming an LLP should not, normally, cause you any tax headaches – so don’t be put off considering making the change.  But do take advice from those qualified to give it.

Huston’s Hint

So long as your business after changing to an LLP is substantially the same then there are no tax hassles.  Perhaps the time to change is on your accounts year-end.