The situation is a newly formed professional partnership set up as an LLP with 3 individual partners, which is making losses, which is being funded by one of the partners. The other two partners take ad-hoc drawings as an when funds are available, so are effectively provided an income partly funded by the other partner.
As far as I am aware, none of the partners fall foul of the LLP disguised employment conditions, so can therefore be treated as self employed and taxed on profit share as per a traditional partnership set-up.
In the first year the LLP will make a loss, even after partnership adjustments for drawings, therefore on their SATR the profit share would be £Nil.
My query is related to the claiming of working tax & child tax credits for these two partners, as effectively the self-employed income they would need to notify HMRC of would be £Nil, but they are getting funds (treated as drawings) out of the LLP to live off, so are these amounts also required to be notified to HMRC as income when providing information for claiming tax credits?
Can any one help with the legal position here as I would not want the two partners to claim tax credits incorrectly.
Finally, on the basis they are indeed entitled to tax credits, what's the view on the morality of this, given that the two partners do receive some sort of remuneration (although be it classed as drawings) throughout the year. I assume that it is up to the individuals to decide and I should at least provide the partners with the information of what they are and aren't entitled to do?
Thanks
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More a legal question
What does the agreement between the partners say? If no agreement, then legal advice is even more advised. Default provisions and deemed contract terms are a minefield.
You say these payments are classed as drawings and, with no profits, that must mean the relevant partners are drawing out more than they are entitled to. No s455 (because this is an LLP, not a company), but not usually allowed in partnership agreements.
If they are drawings, there should be no adjustments required to the profit and loss account as you suggest. They should never even go near the profit and loss account. Be very sure of how you are recording these.
Are you really sure about the disguised employment position? You have two people taking money that a third is providing. If it is not to secure the services of the other two people, why is only the one person contributing? The new rules on non-contributing partners would appear ready to bite quite severely here.
So a lot of concerns. If the situation is genuinely of a legitimately operating LLP that is making losses to be shared normally, then none of the partners can have taxable income.