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"Flexibility" in LLP partners' profit shares

"Flexibility" in LLP partners' profit shares

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We have a client that has formed their own LLP. Their intention is to take profit out of the company in proportion to how much each
partner has contributed in terms of income generated in the accounting period. In other words. they want complete "flexibility" in the
division of the profits rather than the fixed percentage/ traditional type partnership arrangement.
I wonder if anyone has come across such a situation. Can such a clause be written into the LLP constitution and or partnership
agreement ? Or is this a complete nonsense? What would the Inland Revenue's view of such an "artificial" division of profits? Might
HMRC question individual SA Returns where there is no paperwork supporting shares of profits varying from one accounting period to
the next. I would be very interested to hear of anyone's thoughts.

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By ACDWebb
13th Aug 2009 08:57

Surely
Division is by ref to whatever the deed says. If there is reference to allocation by fees billed, or somesuch, and it is reflected in the allocation of profits as well as tax profits then that isn't artificial, just the method that the partnership/LLP uses and there should be no grounds for any attack as to artificiality.

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By Sir Les Patterson
13th Aug 2009 09:11

Taking it a step further
I have seen, during the course of an investigation, the profit share split changed to take into account the investigation results.

HMRC don't like it, but in the absence of a partnership agreement the partners are free to split the profits how they like.

I realise that this is a contentious point, keep chopping the partnership shares depending on profits and personal circumstances does feel uncomfortable, but I gather until anti-income shifting kicks in it's still ok.

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By Marion Hayes
13th Aug 2009 14:31

profit share relating to input
I would have thoiught that this was one of the occassions IR35 provisions should be considered

--
Marion

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Mark Lee 2017
By Mark Lee
13th Aug 2009 16:35

What's the perceived problem here?
The previous comment refers to IR35 although I can't think of any way in which it would be relevant to a case such as this.

The client has formed an LLP. The question then refers to this being a company - which it most evidently is NOT.

The members of an LLP are at liberty to divide the profits as they choose and can set out their approach in a members' agreement but are not obliged to do so. Many of the larger firms of accountants that are structured as LLPs simply authorise the management team to determine the allocation of profits using whatever criteria has been agreed. Sometimes this will be spelled out in the agreement, but not always. The allocation of profits will frequently be at least partly related to the relative billings generated by each partner.

This seems to be pretty similar to what the client is proposing in this case

Why should the allocation of profits by reference to relative billings be seen by anyone as artificial? HMRC would have no interest in this arrangement whatsoever.

The bigger practical issue is how the addbacks and disallowable items are shared as between the members. When I was in practice this was frequently something I found had not been effectively addressed by partnerships - and LLPs are exactly the same in this regard.

Mark Lee
Tax Advice Network

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By oliverday
14th Aug 2009 08:40

LLP profit share
Many thanks for this. In the absence of a partnership agreement in force, "default" rules apply - one of these default rules states that all members share in the profits equally. Thus, HMRC could possibly use this argument, if they considered that one member's share was artificially low. However, one would think that HMRC's prime concern would be to ensure that all LLP profits had been taxed on someone rather than being too concerned about the division.

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Mark Lee 2017
By Mark Lee
14th Aug 2009 11:07

In the absence of agreement to the contrary
The default rules only apply if there is no agreement (verbal or written) as to how profits should be shared.

Mark

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By andrewdiver
18th Aug 2009 11:12

Profit shares
Mark is quite correct. But it goes beyond written or verbal to express or implied. An issue sometimes overlooked and that which is so difficult to challenge. As long as the partners are in agreement it is usually fine. It is preferable to have something contractually bound, but it might even be drawn so widely that this states that they will determine these on completion of the accounts with due consideration to contributions to the firm during the corresponding period.

Profits from partnerships are so often shared in so many different proportions. Unless there are a degree of artificiality to these with a main tax avoidance purpose you will be fine. Examples of such artificial purposes are the introduction of a non-active wife to a partnership. In this respect IR35 might seem appropriate, but I think it is more the settlement provisions contained within Arctic Systems rather than the IR35 issues per-se.

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By cydsmith
18th Aug 2009 16:08

LLP Flexible Profits
We have a client who does this. The LLP is written so that the individual profits are calculated from their own generated income less expenses. They each have their own 'profit and loss account' and it is agreed that some expenses are split 50/50 (e.g. telephone, accounting fees and bank charges) where others are allocated to the individual partners (e.g motor expenses and stationery). The fixed assets are allocated to each partner, quite easy as they are mostly computers etc, current assets/liabilities are quite easy to split so and we can prepare a 'split' balance sheet as well. SA Returns show their 'share' of the profit and have not been queried by Inland Revenue..........so far. If necessary we have the 'accounts' to back up the figures. Bookeeping wise it's a bit of a pain but we use departments on Sage for each partner and that makes the P&Ls and even the VAT return easy to split. It does make you wonder why they are a partnership in the first place though!!

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By Anonymous
19th Aug 2009 08:12

Ltd Company Partner
Example: LLP 4 members. 2 Individuals 2 companies (owned by individuals). Profit shares: All income profits to companies (taxed at 21%). All capital profits (gains) to individuals (taxed at 18%).

Any problems with this very tax efficient structure?

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Mark Lee 2017
By Mark Lee
19th Aug 2009 19:20

Doh
What about the tax payable to extract post CT profits from the company?

Mark

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