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Adjusting LLP profit share to reduce tax

How flexible can LLP profit sharing be?

Client is a small LLP. 2 business partners; not related at all.

Profit in 17/18 was 20,000. the 2 partners drawing reflect their level of sales generated. Partner 1 drew 15,000 Partner 2 drew 5,000. Normally profit would be allocated accordingly on tax returns. Partner 1 has other income from another source bringing him up to 20,000 in total.

If the Partners agreed could they decide the LLP profit was split 10,000 each approximately; This would reduce Partner 1's tax and Partner 2 would still not be taxable and could transfer unused personal allowance to his wife.

Is this allowed or is it tax avoidance

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07th Dec 2018 12:20

And would Partner 1 then pay £5k back to the partnership?

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07th Dec 2018 12:27

Whose idea is this? Yours or the partners’?

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07th Dec 2018 12:51

If that's how the profits are actually divided, it's fine.

The question would be - is that indeed the case ?

I'm thinking the answer might be no but you have your finger on the pulse and may disagree.

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07th Dec 2018 12:51

I am just working on the Accounts now and looking at options. No discussions with the client about this to date.
Just wondering what might be reasonable or feasible before suggesting anything to them hoping there might be some way to mitigate a bit of tax if possible and allowable.

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to anneaccountant
07th Dec 2018 13:05

You say their drawings reflected their sales records.

What does the partnership agreement say about sharing profits ? Is that also on their sales records ?

It seems strange that drawings should be divided in such a way if profits are still to be shared 50:50.

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to anneaccountant
07th Dec 2018 13:17

So you are thinking whether to suggest to Partner 1 that he should make himself worse off by £4,000 (£5k less 20%) so that Partner 2 can be better off?

How would you sell that plan to Partner 1?

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07th Dec 2018 13:06

The profit split is whatever the partners agree, subject to any restrictions in any partnership agreement.

But it has to be their decision, and you should get it in writing from both of them. Tax-efficiency isn't the only consideration.

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By frankfx
07th Dec 2018 13:43

Have you invested in any partnership tax planning books/ journals/cpd/ subscriptions?

You could bill the client for the research material and the advice arising .

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By Roche
to frankfx
10th Dec 2018 14:44

It would be nice if people simply chose whether or not to be helpful or to ignore the questions.

I've lost count of the number of pointlessly snarky "find out for yourself" responses I've read on these threads. Is there a base level of expertise demanded of those who dare to pose a question? As the poster says, she has a couple of LLPs so it's not her main area

Maybe this section should be rebranded as "any helpful answers".

Merry Christmas!

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to Roche
10th Dec 2018 15:24

frankfx's response was in no way pointlessly snarky. I think for any professional advising a particular category of businesses, should their knowledge be lacking in some of the fundamentals of that category of businesses, advice to seek out some research material is good advice.

The question wasn't about some complicated or esoteric point, it was about the rules governing the split of partnership profits, something that will be covered in any good primer for partnership accounts and returns.

Many answers in Any Answers are snarky, and some are even pointlessly so, but I think you're overreacting to that particular post.

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07th Dec 2018 17:27

I think what is being said here then is that if the Partners have been drawing the money out based on the business they have produced (for simplicity say 75/25) they can’t then report a different split say 50/50 to HMRC.
The Partners can decide whatever split they want but they can’t then report a different split to HMRC to reduce one of their tax liabilities.
Is that about it?

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to anneaccountant
07th Dec 2018 17:37

anneaccountant wrote:

Is that about it?

Did you think it would be anything else?

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to anneaccountant
07th Dec 2018 19:00

They can’t be taxed on a different split from the split they have agreed for the actual profits.

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07th Dec 2018 23:48

Many thanks for the clarification .. with hindsight it’s obvious. Very helpful feedback!

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to anneaccountant
08th Dec 2018 11:25

There are entire parts of the taxes acts dedicated to partnership taxation - the oldest being what is now Pt9 ITTOIA 2005. John and al have told you the starting point (it's not just obvious common sense - it's law: s850(1)) but you really ought to know about the rest of the rules if you are dealing with partnerships and LLPs.

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08th Dec 2018 13:09

Thanks John & Tax Dragon. Totally agree with your caveat. I only have 2 LLPs amongst my client base and both very small so I have never developed much expertise in this area. Large more complicated LLPs I have declined - for obvious reasons!

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By ShayaG
10th Dec 2018 14:48

If I could make a more general comment, it is very dangerous to make business decisions affecting the relative position of two partners - especially unrelated partners - in any business structure - corporate, partnership or LLP- purely to secure a tax advantage. Partnerships regularly go sour, and if the advisor has been tricksy at any one partner's putative expense then the negligence and professional complaints exposure far outweighs the benefits of the goodwill of saving a few hundred on tax.

Partnerships have to work equitably, and the tax will follow from that.

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10th Dec 2018 15:43

If there is a mismatch between a partner's profit share and his drawings, there will be an effect on the amount owed to or from the partnership. You can end up with one partner having a large debit balance and the other a correspondingly large credit balance.

Until it actually affects their personal bank a/c, partners often ignore this. Best to brief them now.

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