OM Company charging LLP for director's time?

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I have a client who has a company inwhich he and his wife are main shareholders with alphabet shares for his adult children (a questions in itself).  He is planning on setting up an LLP with a collegue and wants his company to charge the LLP for his time.  Two reasons:  one to reduce his personal income tax liability and secondly to get the profit into the company so it can be distributed as dividends to himself, his wife and his children.  This feels to me like it would be tax manipulation, so my questions are:

What would HMRC's likely view be? 

If he were to have the new business set up as a Ltd Co, would this give a different view on this treatment? 

If the company was the partner in the LLP rather than the individual would there be a different impact?

Would there be IR35 implications of this?

Is there anything else I should be thinking about?

Replies (13)

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By johngroganjga
23rd Oct 2019 10:42

Is he sure the tax he would pay if he took the income as his LLP profit share is less than the sum of the 19% corporation tax the company will pay on it and the income tax he will pay on taking the 81% that is left out of the company as dividends?

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Replying to johngroganjga:
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By Barney W
23rd Oct 2019 11:29

It would be as he is taking it out over time, plus his wife and children are getting dividends too.

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By Tax Dragon
23rd Oct 2019 11:52

What's the arrangement with his colleague that means that charging for time (assuming that's even lawful... IANAL) doesn't skew the profit shares in his favour?

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By Barney W
23rd Oct 2019 12:03

They would both charge for their time. It feels to be like clear tax avoidance, but I am not sure if this is considered 'normal' practice and I am just being too strict.

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By DJKL
23rd Oct 2019 13:03

Personal service Companies????

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By Tax Dragon
23rd Oct 2019 14:05

Why don't the companies form the LLP directly?

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By Barney W
23rd Oct 2019 14:21

That is what I am starting to think - the Companies become the members of the LLP

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Replying to Tax Dragon:
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By The Dullard
23rd Oct 2019 14:57

ITTOIA 2005, s 850D?

Shouldn't the first question not be, why don't the individuals form the LLP directly?

It seems to me that either IR35 bites or the mixed partnership rules do, which takes you to only one logical conclusion. KISS.

Also, OP, why does the entity need to be an LLP? Will the individuals share profits unequally?

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Replying to The Dullard:
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By Tax Dragon
23rd Oct 2019 14:50

The LLP does not yet exist and will have only two members.

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By The Dullard
23rd Oct 2019 14:56

If you're making a point, you're going to need to make it more clearly for me!

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By Barney W
23rd Oct 2019 15:07

The initial idea had been to have two individual members of the LLP. These individuals have separate companies who would invoice the LLP for their time. I think tax avoidance/IR 35.

So the next thought is two corporate members of the LLP. The LLP profits would automatically go to the member companies and be taxed on them accordingly.

There would not be mixed membership as it is either two individuals or two companies.

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By The Dullard
23rd Oct 2019 15:17

Yes, but s 850D applies to tax the profits on the individuals if "it is reasonable to suppose" that the individuals would be members but fir s 850C (which taxes the profits on the individuals if they are members).

Why does the entity that will be an LLP need to be an LLP? Can't it be a company and each party takes up their share of the profits into their company each period?

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By Barney W
23rd Oct 2019 15:52

Thank you, I now understand. They don't want a company as they prefer the flexibility for a LLP both from a admin and profit distribution view point. I've gone back to them and said they need to consider this against the tax implications of the profits being taxed against them as individuals.

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