Lee Sharpe compares and contrasts the treatment of limited companies and limited liability partnerships.
The table below takes a bird’s eye view of the approach to taxing companies versus taxing limited liability partnerships (LLPs):
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Limited companies (Ltd)
Treated as body corporate
Entity subject to corporation tax (at 19%-25%), corporation tax returns, etc. Applies to trading or investment profits or...
…corporation tax on capital gains (at 19%-25%), irrespective of whether residential property |
Limited liability partnerships (LLPs)
Treated as a general partnership Except when – not carrying on a business to make a profit (e.g., on cessation, although temporary/brief cessation generally overlooked)
Entity treated as transparent for tax purposes – partnership tax return summarises results for LLP; then allocated to individual members for them to be taxed at: income tax 20%-45% (plus NICs, as relevant) or CGT 10% or 20% (18% or 24% on residential gains); (LLPA 2000, ss 10-13, as amended)
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Limited liability: General application Shareholder’s share capital is exposed |
Member’s capital invested is exposed (but no minimum capital contribution requirement) |
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Special tax regimes No cash basis for tax purposes, as must observe Companies Act requirements, generally accepted accounting principles, etc.
'Loan relationships' regime – interest relief, capital adjustments, write-offs, etc. affect taxable profits (no particular distinction between revenue and capital adjustments)
Corporate intangibles regime
CGT incorporation relief for transfer of qualifying business into company
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Cash basis by default for trading and landlord businesses (except if there are any corporate members in the LLP)
As for income tax generally, with no revenue adjustment for capital items; interest relief subject to restriction for residential lettings and, simply, relief restricted if capital account not in credit (Silk v Fletcher [2000] SpC 262)
CGT as applicable to intangible assets
Statement of Practice D12 governing CGT on joining/leaving LLP and changes to capital-sharing ratios
FA 2003, Sch 15 regime covers similar changes from an SDLT perspective - but note in particular application to profit-sharing ratios and property investment partnerships; FA 2003, s 65: partnership business to LLP
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Special tax relief regimes R&D enhanced reliefs for expenditure on revenue account
'Creative industries tax reliefs': Films and 'high-end television' Children’s television Animations Orchestral & theatrical productions Museum & gallery exhibitions Video games
Reconstructions: transfer of trade maintains losses, etc., where NewCo with 75% similar underlying ownership carries on same trade
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N/A
N/A
N/A |
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Capital allowances Annual investment allowance (AIA) - Restricted to single £1m per annum limit for one or more group(s) of companies, etc., under common control of same person
Full expensing (and historically super-deduction/50% first-year allowances)
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Single £1m per annum limit for an LLP but only an LLP whose members are all individuals is eligible for AIA as a 'qualifying person'.
In relation to LLP assets, full expensing available only to the proportion that the asset ‘belongs’ to corporate members) (if any)
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Anti-avoidance IR35/off-payroll working to tax indirect employment as if subject to PAYE
Loans to participators (‘s 455 tax'); more esoterically, disguised remuneration/‘the loan charge’.
(No equivalent regime) |
Strictly, IR35 rules apply to partnerships as well, although much less common. But HMRC more likely to treat ‘salaried members’ as employees under regime starting at ITTOIA 2005 s 836A (where low risk to member income and capital; minimal influence over LLP, etc.)
No tax penalty for broadly equivalent scenario of an overdrawn member capital account (but see consequence for interest relief above)
‘Mixed’ partnership anti-avoidance regime counters profit-sharing arrangements that divert unneeded personal profits to corporate members of LLP, hoping to avoid income tax/NICs that might otherwise immediately accrue to the individuals (ITTOIA 2005, s 850C)
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Losses Corporation tax loss regime – relief applicable to entity (Ltd company) Against total profits/gains, carry-forward and carry-back subject to a £5m limit on reliefs (across group) above which relief restricted
Group relief/consortium relief from one company to another fellow company in qualifying circumstances |
Income tax loss regime – applicable to members Relief against other income restricted to the member’s cumulative net capital contribution; further restriction for ‘non-active’ members as individuals (ITA 2007, ss 107-111) or companies (CTA 2010, ss 59-61)
While there can be LLPs as members of LLPs, there is no special provision for distributing losses around more complex LLP models beyond its profit- or loss-sharing agreement
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Investing in entity Enterprise investment scheme (EIS), seed EIS (and investors’ relief) for individuals subscribing for shares in qualifying smaller companies carrying on eligible activities
Income tax personal interest relief on loans to acquire interest in qualifying close companies or to lend money for qualifying purpose |
No equivalent incentives
Similar, but not in years when LLP counts as an ‘investment LLP’, i.e., wholly or mainly making investments, etc.
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Personal status of principals in business Employee/officer (as director, etc.) or investor as shareholder |
Self-employed (or property business) (very simply, LLPA 2000, s 4)
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Profits variation/extraction to principals Dividends should be paid in proportion to shareholdings; one can temporarily waive some or all entitlement, or have different classes of share, or vary through salary/benefits instead of dividends; beware settlements anti-avoidance legislation risk for ‘excessive’ waivers
Ongoing company, assuming income and gains fully distributed to individual principals: Dividends net yield range 44.58% - 73.91% Salary net yield range 46.57% - 63.27%
Undistributed profits on disposal of entity: CGT range 58.8% - 72.9% |
Very flexible: profits may be shared as decided from time to time (albeit not retrospectively); HMRC guidance appears to accept settlements anti-avoidance legislation harder to invoke in partnership scenarios (see HMRC’s Partnership Manual at PIM132400; Trusts Settlements and Estates Manual at TSEM4215)
Trading profits net yield range 53% - 74% Rental profits net yield range 55% - 80% CGT net yield range 76% - 90%
N/A – already taxed when profits arose (NB all rates assume basic-rate taxpayer or higher)
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