Share this content
0
310

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

Replies

Please login or register to join the discussion.

avatar
07th Dec 2018 12:20

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

Thanks (0)
07th Dec 2018 12:27

Whose idea is this? Yours or the partners’?

Thanks (0)
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.

Thanks (0)
avatar
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.

Thanks (0)
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.

Thanks (0)
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?

Thanks (0)
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.

Thanks (0)
avatar
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 .

Thanks (0)
avatar
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?

Thanks (0)
avatar
to anneaccountant
07th Dec 2018 17:37

anneaccountant wrote:

Is that about it?

Did you think it would be anything else?

Thanks (0)
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.

Thanks (0)
avatar
07th Dec 2018 23:48

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

Thanks (0)
avatar
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.

Thanks (0)
avatar
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!

Thanks (0)
Share this content