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How to allocate LLP Profits to LTD

How to allocate profits of an LLP to a LTD with different accounting periods

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It's been awhile since I've dealt with LLP's profit shares and taxable profits!!

I've recently taken on a new LTD client that has an interest in an LLP effective from the 1st October 2018, 4 partners including the LTD.

The LTD accounting period runs from the 1st Oct to 30th Sept, and the LLP runs from the 1st Jan to the 31st Dec.

 LLP profits for the period 1st Jan 2018 to 31st Dec 2018, per the financial statements is £100k, broken down as 33.3% share of 9/12ths of £100k and 25% share of 3/12ths of £100k.

Profit Share Partner 1 Partner2 Partner 3 Ltd Partner
£75,000 £25,000 £25,000 £25,000 NIL
£25,000 £6,250 £6,250 £6,250 £6,250
£100,000 £31,250 £31,250 £31,250 £6,250
The taxable profits are £79k, which has been recorded in the 2019 Partnership Tax Return (SA800)
Profit Share Partner 1 Partner2 Partner 3 Ltd Partner
£59,250 £19,750 £19,750 £19,750 NIL
£19,750 £4,937 £4,937 £4,937 £4,939
£79,000 £24,687 £24,687 £24,687 £4,939

However, the area that I'm a little rusty on is the LTD treatment and recoginition of the LLP's profit share, i.e. in the LTD accounting period 1st October 2018 to 30th September 2019, do I just record the £6,250 profit share in the statements and related taxable profits of £4,939 in the CT600 comp, or do I record the aggregate of the £6,250 profit share and 9/12th of the LLP's profit share for the period endig 31st December 2019, with similar treatment for the taxable profits, assuming the LLP's financial statements and SA800 have been completed!

Any clarification would be greatly appreciated.

Many thanks

Replies (7)

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By johnt27
16th Sep 2020 08:49

Your accounting treatment in the company depends on what the LLP agreement says (I bet they don't have one!)

The LLP agreement determines on what basis profits are allocated and whether or not the recognition rules in respect of distributions apply. If profits aren't determined until either the year end or post year end then the company won't recognise anything until such time as these profits are deemed to be distributed. If profits are allocated on a fixed basis, say monthly, then the company recognises it's share by month.

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By johngroganjga
16th Sep 2020 09:26

I disagree with the above. The company must recognise a best estimate of its profit share in the nine months ending on its year end.

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Replying to johngroganjga:
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By Paul Crowley
16th Sep 2020 09:40

I agree
it is a partnership and partners are taxed on profits, not distributions.
Even if the partner is a company

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Replying to Paul Crowley:
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By johnt27
16th Sep 2020 09:52

Really? If the company had an interest in a company you wouldn't recognise dividends until voted. The same rules apply to LLPs for accounts purposes which is why it's so important to have a LLP agreement properly drafted. I should have been clear I wasn't talking about the company corporation/deferred tax comp recognition.

Just as a company can choose not to distribute it's profits to the shareholders an LLP can choose not to distribute profits or losses to the partners and instead retain these in equity if the LLP agreement permits it. Quite commonly we advise our LLP clients to draft their agreements such that any losses are not allocated, thus protecting their capital.

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Replying to johnt27:
By johngroganjga
16th Sep 2020 11:49

It makes no difference whether the profits are retained in the LLP or distributed, the company member is still entitled to its share and must recognise it as it accrues. The balance in the company’s books for the LLP must as nearly as possible be the mirror image of its capital account in the LLP’s books.

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Replying to johngroganjga:
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By johnt27
16th Sep 2020 14:27

https://www.ccab.org.uk/wp-content/uploads/2020/06/Statement-of-Recommen...

The SORP is clear on the division of profits and losses and how they are recognised in the LLP's accounts (see para 48). As you say the converse should be applied in the company books.

As I previously said if profits accrue to partners as they are earned then they are recognised as such, if profit shares are determined, such that they are an appropriation of equity, these are a distribution under CA 2006 and are only recognised when the liability crystallises. This will either be laid out in the LLP agreement or will default back to the LLP regulations in the absence of an agreement.

You could conceivably have a tax charge in the company for profits from the partnership tax return, not recognised in the accounts until the following year until the appropriation in the LLP has been agreed.

The company may well have it's "capital" invested as both equity and a loan in the LLP so the accounting can be challenging.

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Replying to Paul Crowley:
Stepurhan
By stepurhan
16th Sep 2020 14:59

Paul Crowley wrote:

I agree
it is a partnership and partners are taxed on profits, not distributions.
Even if the partner is a company

Whilst this is correct, it is possible for a partner to have a nil share of profits.

So if profit share is determined after the company year end, then it should not be recognised until it is determined.

The flip side of that is that if there is no agreement stating otherwise, HMRC are likely to argue that the default is an even split, so accruing the profits up to the accounts year end (which gets them the CT on that profit earliest) is correct.

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