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New tax rules for LLPs

We asked our two Tax gurus about the implications for HMRCs proposals to the LLP tax rules.

Tonmoy Kumar, Manager of the Accounts Department of ABDS comments:
“We were warned in the 2013 Budget about the consultation document Partnerships: a review of two aspects of the tax rules. However, the implications of the proposals may yet catch out some organisations, particularly as businesses whose current accounting period ends after 6 April 2014 will be affected in this financial year.”

Stuart Coleman, Manager of the Tax Department of ABDS comments:
“HMRC want to bolster specific anti-avoidance tax rules, but there is no intention to target partnerships that simply converted to LLP status, partnerships where the profit sharing ratio is determined wholly on business grounds or family businesses where no value is exchanged for the artificial profit allocation. Nonetheless, a large number of businesses will be affected.

“HMRC believes artificial profit/loss allocation is used for tax avoidance where partnerships with mixed membership (individuals and companies etc) allocate profits or losses between members to reduce or defer tax, and where members have differing tax attributes (exempt and non-exempt partners, etc) and income streams are transferred to avoid tax.
For partnerships with mixed membership, tests are proposed to allow normal commercial arrangements. However, where “it is reasonable to assume that the main purpose or one of the main purposes, of the partnership profit-sharing arrangements” is tax avoidance, the new rules may apply.”

“HMRC could then reallocate the profits for tax purposes to the partner that would pay the largest UK tax bill or simply deny loss relief claimed. Similarly, for members with different tax attributes, the proposals would effectively ignore the artificial profit allocation to a partner with a lower/zero tax profile, so that the transferor partner suffers the tax

“HMRC also propose to look at the problem of disguised employment. The document proposes two tests will establish if an individual member is, in reality, a ’salaried partner’ (liable to PAYE, employers’ and employees’ NIC).”

“Initially, tests from HMRC’s Employment Status Manual will be used. However, if the employment status tests are not relevant, HMRC would then seek to establish if the individual is:

  • At financial risk if the LLP makes a loss or is wound up
  • Entitled to a share of the profits
  • Entitled to a share of any surplus assets on a winding-up.”

The consultation closes on 9 August, so we will keep you informed as to any developments.

If you need any help and advice for your business on Partnership Tax, Corporation Tax or you need to keep abreast of changes in legislation and how it could impinge upon your business, contact Lavinia Newman, Stuart Coleman or Tonmoy Kumar to discuss how ABDS can help

ABDS Chartered Certified Accountants of Southampton.
Tel: 023 8083 6900  E-mail:

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