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LLP Accounts - help !!!

Hi, first time preparing an LLP set of accounts and having run the disclosure check I seem to be left with one query to resolve. The partnership agreement states that the partners receive a salary of X plus the partnership pays the tax on the salary. I appreciate that the salary is treated as members remuneration charged as an expense but what do I do about the tax element which is paid after the year end. Do I debit the salary expense and credit a tax reserve in the accounts or simply reflect the tax elemant in the profit allocation and debit the salary to drawings when paid. Essentially if I credit a tax reserve I end up with a lower capital account.

Any help would be greatly appreciated.

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25th Jan 2013 17:42

How do you know

what tax is due?

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25th Jan 2013 20:09

Re tax paid

 The tax is calculated based on the set salary paid to the partners, the residue is then allocated on a % basis.

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25th Jan 2013 21:05

But how do you know

the partners tax position? How would the tax be calculated? At the highest rate of income?

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By Triggle
25th Jan 2013 21:41

Are you sure that the salaries are to be treated as "members remuneration charged as an expense"?

Looks like just a profit share to me - an appropriation of profits before the remaining profits are split in the agreed ratios.

The salary concept is generally there to ensure that if one partner puts more effort into the trade or profession then he is remunerated by a fixed amount before any other profits are split.

If the partners all get the same salary then there is no point in having a salary clause in the agreement.

The fact that the partnership pays the tax is confounding as well. A partnership is just a trading vehicle - the partners pay the tax on their share of the profits. If the partnership pays the tax then effectively the partners are paying the tax. Think on -  if the partnership bank account pays the tax then the debit will be to the respective partner's drawings account.

It is possible to have a partner drawing a "proper" salary (i.e through the payroll like just an ordinary employee) but this is usually where the partner is, say, a consultant who is not entitled to a profit share.

If it is a profit share then, needless to say, it should not be charged to the P&L account.

The partnership agreement wasn't drafted by a lawyer was it?

 

 

 

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By ACDWebb
26th Jan 2013 13:05

There was a similar thread to this a while back

Have a look HERE

To quote neileg from there:

"A partner's salary is a prior allocation of profits, not drawings. The effect of salaries is to share profits differently from a straight profit share and a partner is taxed on their salary plus their share of residual profits (or losses if the salaries exceed the available profit)."

And me:

'"Salary" in connection with partners is a misnomer. It does not mean that it is taxed under PAYE, but is merely a method of arriving at profit share - ie one might have partners who receive a base share (salary) with the remainder being allocated in agreed proportions, but that is all profit share'

A partnership might have salaried partners who are taxed under PAYE, but there must alway be at least two equity partners in a firm for you to have a partnership.

What you seem to have is a bunch of equity partners who have decided that they will take a prior share of profits, which in the partnership agreement they have called salary, and split whatever profit is left. That prior share is not a deduction for tax, nor is it taxable under PAYE.

If they have been drawing out their "salary' during the year that is merely drawing from the partnership on account of their ultimate profit share

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