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how do you account for money lent to your own LLP?

how do you account for money lent to your own LLP?

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We have a client with conflicting advice regarding an LLP Member making a loan to his own LLP.  The Member is a Jersey company, but I don’t think that makes a difference here. The loan is commercial and subject to its own loan agreement, and interest is to be paid to the Member by the LLP on the loan. Our thinking is that:

 

  • The loan is included in LLP capital in the Accounts,
  • Interest paid does not touch the P&L, but is included with that LLP’s profit share, and taxed accordingly.
  • Interest paid is not subject to withholding tax under the CT61 system.

The Jersey side have different advice. They are saying that, as the loan is commercial, interest bearing and subject to its own loan agreement, then its just like any other 3rd party loan to the LLP. So included in Creditors and Interest Payable in the Accounts. The interest is not a prior profit share, but is interest subject to CT61 rules.

 

I thought that money lent to your own LLP was always just capital introduced, interest bearing or not? Nothing in my research has so far made me doubt that.

 

 

Replies (17)

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By Paul Crowley
22nd Mar 2021 13:47

Is the lender a bank?

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Replying to Paul Crowley:
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By colsky65
22nd Mar 2021 13:50

Paul Crowley wrote:

Is the lender a bank?

No.

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Replying to Paul Crowley:
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By colsky65
22nd Mar 2021 13:51

Paul Crowley wrote:

Is the lender a bank?

duplication!

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By Justin Bryant
22nd Mar 2021 14:36

Why on earth is this not accounted for as a loan as the Jersey people are correctly saying? Where does it say you cannot lend money to your own LLP or that it's automatically treated as capital? Perhaps you are getting confused with GPs, but even then loans to GPs are fine.

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By colsky65
22nd Mar 2021 14:37

Because the lender is a member of the LLP, and we thought the accounting was therefore to add it to the Members' Capital. I didn't think it was a bizarre question!

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By Justin Bryant
22nd Mar 2021 14:45

An LLP is a body corporate, like a company. By analogy no-one would think a shareholder loan to a company should be treated as additions to capital.

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Replying to Justin Bryant:
Maytuna
By DJKL
22nd Mar 2021 15:00

The accounts presentation does often effectively bundle loans and capital together at the foot of the balance sheet, see attached, particularly Note 17 and the grey box note below.

https://www.grantthornton.co.uk/globalassets/1.-member-firms/united-king...

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Replying to DJKL:
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By Justin Bryant
22nd Mar 2021 16:56

I think what's relevant here is to be disabused from the idea that "money lent to your own LLP was always just capital introduced" and the incorrect consequences that would otherwise follow (e.g. you might not be able to secure preferential repayment of the loan against the LLPs assets unless it was a loan, properly so called).

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By colsky65
22nd Mar 2021 16:52

Justin Bryant wrote:

I think what's relevant here is to be disabused from the idea that "money lent to your own LLP was always just capital introduced" and the incorrect consequences that would otherwise follow.

Ok, so its a loan to the LLP, but still included within Members' Interests in the Accounts, but in its own column.

When you say incorrect consequences, are you then saying that they should be deducting income tax from the interest via CT61s, or otherwise reporting the tax and interest to HMRC, rather than including the loan interest as a prior share within the profit shares?

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Replying to Justin Bryant:
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By colsky65
22nd Mar 2021 14:46

Justin Bryant wrote:

Why on earth is this not accounted for as a loan as the Jersey people are correctly saying? Where does it say you cannot lend money to your own LLP or that it's automatically treated as capital? Perhaps you are getting confused with GPs, but even then loans to GPs are fine.

Would you also say that they should be deducting income tax from the interest via CT61s, or otherwise reporting the tax and interest to HMRC.

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Replying to colsky65:
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By Justin Bryant
22nd Mar 2021 16:50

Can you not use Google?

https://www.gov.uk/government/publications/corporation-tax-return-of-inc...

https://www.accountingweb.co.uk/any-answers/interest-paid-by-llp

I also note this from the link below:
"JUSTINBRYANTR, 08/02/2017 12:16:00
Many people believe that a partner cannot make a non-equity “loan proper” to a partnership of which they are a member, and that any interest on such a (non equity) proper loan must necessarily be treated as a pre-division of profit which forms part of the partner’s profit share.

However, the Revenue Manuals confirm in the link below that such (non equity) proper loans can be made by companies (which I think must be right).

http://www.hmrc.gov.uk/manuals/cfmmanual/cfm36050.htm

The Revenue Manuals suggests in the link below that this could also apply to human members of an LLP.

http://www.hmrc.gov.uk/manuals/bimmanual/BIM45735.htm "

https://www.taxation.co.uk/articles/2017-08-01-336768-readers-forum-part...

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By Duggimon
22nd Mar 2021 14:39

Does the fact it's a Jersey company remove the application of section 455?

It is a loan to a participator and unless the company is in the business of lending, or there's some other exemption in place, it is chargeable to tax under s 455

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Replying to Duggimon:
Maytuna
By DJKL
22nd Mar 2021 14:45

Is the participator not the Jersey Company itself?

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Replying to DJKL:
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By colsky65
22nd Mar 2021 14:48

DJKL wrote:

Is the participator not the Jersey Company itself?

The Jersey Company is the giver of the loan, not the receiver.

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Replying to colsky65:
Maytuna
By DJKL
22nd Mar 2021 16:56

And also a participator as a member of the partnership receiving said loan, though not convinced there is a s455 issues , I suspect we would need to know who the other members were to take any view.

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By Hugo Fair
22nd Mar 2021 15:08

This is not my area of expertise ... but does this AWeb thread help?
https://www.accountingweb.co.uk/any-answers/tax-planning-involving-use-o...

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Replying to Hugo Fair:
Maytuna
By DJKL
22nd Mar 2021 17:00

The main thread pre dates the rule changes re loans to partnerships which were introduced in 2013

https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm61520

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