LLP fixed share partner tax?

LLP fixed share partner tax

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I am forming the accounts for a small LLP.  Partner type is equity (2) and fixed share partner (5).  The fixed share partners draw salaries within a financial year but also set aside from the salaries monies reserved for future income tax, when due and paid by the LLP on behalf of these partners.  So in the drawings will be gross drawings as salaries (being the fixed share) and tax reserve amount deducted.  The partner is paid the net amount at bank.  My question is which figure in the year end LLP accounts should be represented for that partners own profit share in their LLP current account - gross (being amount fixed to them but not fully used up after sacrificing cash payment for tax money) or net amount (being amounts physically paid to them).  Obviously this has tax liability implications for both the fixed share partner (who is paying tax on fixed drawings partly paid to them), and the emerging balance is to be equally split among the equity partners (i.e. after fixed share profits are allocated).  Really appreciate the answer or nudge in right direction from contributors.  Thanks!

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By johngroganjga
03rd Jul 2019 05:59

I think you are over-thinking. You credit each partner with their profit share -gross obviously. You debit each partner with their drawings. If you want to debit them also with transfers to a tax reserve account in their name, and then debit the tax there when it is paid, you are welcome to, but it is perhaps an unnecessary complication.

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AXH
By [email protected]
03rd Jul 2019 06:27

So if I am following you correctly... you put gross salary in current account (regardless of whether they used it up their fixed share as all paid salary or not). I am considering fixed share as a debit to drawinga. They pay tax on gross amount. Their current account is further reduced by tax monies held back in reserve from their salaries. Option to make the reduction (debit to drawings) when tax is paid, when reserved (set aside) or both - this could overlap years to which the taxable income related.?
Just wanted to be 100% so not to mess up .

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Replying to [email protected]:
By johngroganjga
03rd Jul 2019 07:59

You are still over thinking. The fixed share is a credit to the partner’s account, not a debit.

This is simple stuff. I suggest you take a deep breath and start again.

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AXH
By [email protected]
03rd Jul 2019 08:24

If I explain the mooting having with concerned partner in the backdrop, perhaps that will help. The partner has convinced themself that they only have to pay tax on physical cash salary they received in their bank account during the course of the year and asking why they have to pay tax on unused element of their fixed profit share nor do they comprehend why tax reserve is deducted from drawings when not yet paid, and again when it is physically paid. For my own santity wanted some reassurance that I am correct. Even if it seems simple to you, would prefer balanced answers from you. Do appreciate your advise thus far nonetheless. Thanks

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Replying to [email protected]:
By johngroganjga
03rd Jul 2019 08:25

That’s a different question altogether. Are you the tax adviser to the partner in question? If not refer him to whoever is. If so, just explain that it was ever the case that partners / LLP members pay tax each year on their profit shares, regardless of the extent to which they leave them in their current accounts or draw them out.

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Replying to [email protected]:
By Tim Vane
03rd Jul 2019 08:31

The whole notion of “physically paid” is a complete irrelevance from a tax point of view so ignore it. The partner is taxed on profit whether he “physically takes” it or not. How you account for the movements of monies is up to you but you do seem to be complicating things unnecessarily.

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AXH
By [email protected]
03rd Jul 2019 08:47

Totally agree. Preaching to converted. I just need to be absolutely sure I am not missing something before standing my ground with the partner. This has given me the resolution to do so and thank you that.

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By Ashley Hughes
14th Jul 2019 14:02

Hello johngroganjga
Sorry to come back on this again. One of the partners went on maternity leave and was paid a reduced salary for that period (based on maternity allowance for self-employed). That partner is contesting they need to pay full tax on their full fixed share (had they not gone on maternity leave). They are arguing the LLP agreed with them to reduce the profit share to take into account the maternity leave. Does this alter or obscure our previous stance in saying the fact they used up less than their full fixed share is irrelevant for tax purposes?
My answer to them is that as they were paid less, they now have more retained profit in their drawings/current account...the fact they agreed to accept less (akin to an employee on maternity pay) was their decision alone and would not of been advisable from me. I am not over-thinking it, its just I seem to have a set of partner who think the less they get physically paid, the less they are taxed mentality, so for me its like pulling teeth explaining this stuff to them - I just need some assurances and ammo to fight back with the concerned partners. Thanks. Much appreciated.

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Replying to Ashley Hughes:
By Paul D Utherone
15th Jul 2019 09:31

What was their agreed profit share while on maternity? If it was agreed that their profit share (not their drawings) be reduced by 50% then I would expect their taxable to be reduced by reference to the gross share credited to current account.

You are presumably certain that the fixed share partners are not caught by ITTOIA s863 et seq?

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Replying to Paul D Utherone:
AXH
By [email protected]
15th Jul 2019 10:13

Re ITTOIA
The partner tells me they did not claim maternity allowance so should not be any overlapping benefit. The LLP is a going concern and so does not apply.

I asked what provisions were made in the LLP agreement and they tell me contractually a £5k reduction of fixed share was agreed for a maternity period taken. So £30k for a full complete year became £25k after 6 months maternity was taken. The monthly amounts for maternity period appear random and when asked they say worked backwards and agreed ad hoc sums per month. Tbh sounds like thats their prerogative, my concern is the prorata reduction they made to be reflected in their current a/c (£25k), as opposed to fixed share as if they completed a full year (£30k). Sounds like £25k gross share to the current a/c represents their taxable income from LLP - you agree?

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By Paul D Utherone
15th Jul 2019 12:31

Ultimately it's not for you to decide, but the partners in accordance with the the LLP agreement.

In addition, and possibly first, you need to be certain that the FS partners are not in any event caught by the disguised remuneration rules.

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By Vile Nortin Naipaan
15th Jul 2019 12:23

Are the partners in question treated as employees under the new (well post FA 2014) rules? If so, you may have got some duff advice. Strange thing to happen on the internet admittedly.

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Replying to Vile Nortin Naipaan:
By Paul D Utherone
15th Jul 2019 12:26

...which is what I was actually getting at re ITTOIA 863A...

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Replying to Vile Nortin Naipaan:
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By Ashley Hughes
15th Jul 2019 14:10

No, not treated as employees as their fixed share remunerations are intrinsically links to profits of the business and contributed capital (> 25% of FS remunerations) when they joined the practice as partner 18 months ago. presumably this is sufficient criteria to convince HMRC the arrangement between partner and LLP is not primarily motivated or merely to avoid employment relationship and associated NI payments.

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By Bobbo
16th Jul 2019 14:34

How exactly is a fixed remuneration intrinsically linked to the profits of the business (which surely vary year on year)?

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By Ashley Hughes
17th Jul 2019 07:42

I mean't where LLP does not make a profit they don't get their fixed remunerations, and unlike a traditional partnership, the equity partners not liable for it. Yes at the same time, the for share of equity partners vary year-to-year being intrinsically linked to LLP profits. I get what your saying though.

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