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LLP tax

Profit share

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My partner and I just set up an LLP. our share of the partnership and profit is 50/50, but with a flexible profit share should we decide otherwise in any given period.  I want to put an electric car through the company on PCP - it will be used partially for business – but it seems to me there are significant tax benefits of paying through the company.  This will impact the profitability of the partnership and it would be unfair cost on my partner as he already has his own car - he would effectively be paying for my car if we share the remaining profit 50/50 as intended. The partnership agreement has allowed for flexible profit share year on year so can I just split the profit in his favour to reflect the car PCP payments at the end of the year for tax purposes? For example, we have agreed on £4000 per month in drawing as we know our annual income – customer contracts are fixed retainers.  Say my PCP payments are £1000, so I just take a remaining £3000 as my drawings - I am effectively being remunerated partially through the £1000 per month PCP payments rather than drawings. I don’t care about the car ownership as I will likely not make the final payment. Pre PCP, the total LLP profit for the year would be £96000, so after PCP it would be £84000. I’ve taken £36000 in drawings post PCP and my partner has taken £48000. Instead of a 50/50 split for we split the profit  43/57%.  I, therefore, would account for £36,000 in my tax. Is this allowed by HMRC?  Thank you 

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By jonharris999
18th Aug 2020 15:52

Who owns the car? (Who's signing the contract with the car supplier - who's the legal owner?)

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Red Leader
By Red Leader
18th Aug 2020 16:43

Good luck Jon.

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By andrewxk
18th Aug 2020 21:03

The partnership would own the car as it will be making the PCP payments

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By jonharris999
19th Aug 2020 07:23

@Andrew As you can tell from the content and tone of the comments here, this is too complex for a quick answer and relates to other aspects of your setup and taxation.

Without thinking about it harder I can't see why you think there are "significant tax benefits to putting it through the LLP" when you then adjust the share between you (which in itself I consider perfectly allowable).

Everything you 'benefit' from (small 'b' not big) is going to get taxed and there are detailed rules and cases explaining different aspects of your situation but you need proper advice on this one.

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By andrewxk
19th Aug 2020 08:00

Thank you for this. I might be getting it wrong but I was thinking that since the PCP payments will be paid before tax, and there is no BIK tax on electric cars, then it would be better to pay through my share of partnership profits - rather than paying for the car out of after-tax earnings.

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By Tax Dragon
19th Aug 2020 08:20

You are getting it wrong. Jon's recommendation to take advice is seconded.

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By johngroganjga
18th Aug 2020 16:58

HMRC can’t direct how you share profits, so your question as to whether they would allow you to change the profit sharing ratios is completely the wrong one. It’s a free country.

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By Tax Dragon
18th Aug 2020 17:19

"It's a free country" is your answer to so much. But tax law doesn't always follow suit. HMRC in the manuals makes a lot of Bucks v Bowers [1969] 46TC267. See e.g. PM137000 and BIM82055.

(I've never seen it be an issue in practice [and perhaps I have picked the wrong instance to pick you up on your bolshiness], but one shouldn't dismiss it as an issue in theory.)

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By johngroganjga
18th Aug 2020 17:37

I see nothing in those manual extracts to suggest HMRC think they have any power to tax partners on the basis of different profit sharing ratios from the ones they have actually shared the real profits in. Bucks v Bowers if I understand correctly is about changing the profit sharing ratios retrospectively, which is of course an entirely different matter, and a special case.

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By Tax Dragon
18th Aug 2020 19:54

You are correct. Somehow I had read retrospection into the question. (And I definitely did choose the wrong instance!)

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By Paul D Utherone
18th Aug 2020 17:30

For posterity:

andrewxk wrote:

My partner and I just set up an LLP. our share of the partnership and profit is 50/50, but with a flexible profit share should we decide otherwise in any given period.  I want to put an electric car through the company on PCP - it will be used partially for business – but it seems to me there are significant tax benefits of paying through the company.  This will impact the profitability of the partnership and it would be unfair cost on my partner as he already has his own car - he would effectively be paying for my car if we share the remaining profit 50/50 as intended. The partnership agreement has allowed for flexible profit share year on year so can I just split the profit in his favour to reflect the car PCP payments at the end of the year for tax purposes? For example, we have agreed on £4000 per month in drawing as we know our annual income – customer contracts are fixed retainers.  Say my PCP payments are £1000, so I just take a remaining £3000 as my drawings - I am effectively being remunerated partially through the £1000 per month PCP payments rather than drawings. I don’t care about the car ownership as I will likely not make the final payment. Pre PCP, the total LLP profit for the year would be £96000, so after PCP it would be £84000. I’ve taken £36000 in drawings post PCP and my partner has taken £48000. Instead of a 50/50 split for we split the profit  43/57%.  I, therefore, would account for £36,000 in my tax. Is this allowed by HMRC?  Thank you 


Maybe, maybe not. There's not enough information in your post unless one makes a load of (dangerous) assumptions.

Who owns the car?
What does your accountant say?

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