Limited Liability Partnerships (“LLP”) Print

In law LLPs are regarded as bodies corporate, which are subject to aspects of company law, and are required to file an annual Confirmation Statement, etc at Companies House. For tax purposes they are transparent, and the members of an LLP are taxed on their respective share of the profits of the LLP. Individuals who are members of an LLP are also liable to Class 2, and 4 National Insurance Contributions. The main advantage, as the name suggests is that unlike a partnership whose liability is unlimited, the members of an LLP do not put their personal wealth directly at risk, and LLPs are particularly attractive to professional partnerships.

The trade of an LLP is treated for tax purposes as if it were a partnership, although on the appointment of a liquidator it will be treated as if it is a company.

Where trading losses are incurred by the LLP, their treatment is dependent upon whether the LLP carries on a profession, or a trade. A profession is treated more beneficially, and any loss arising to a member will be treated in the same way as if the business is carried on through a conventional partnership. Subject to the restriction to losses as discussed under the headings “Cap on Unlimited Reliefs” and “Partnerships and other Self-employed Individuals”, each member will be entitled to set the loss against his general income of that year, or against his income of the previous year.

Where the losses are derived from the carrying on of a trade, the availability to set the loss against general income is restricted to the amount of capital the member has contributed to the LLP. Any excess loss will be carried forward and will be available for relief against general income for the fiscal year in which further capital is subscribed.

In the case of both professions and trades, the loss may instead be carried forward and be offset against the member’s future share of profits from the same trade.

The less beneficial treatment of losses arising to an LLP carrying on a trade was designed to discourage traders from forming LLPs as this legislation is intended for the benefit of professional partnerships.

Where an existing partnership converts to an LLP the partner’s personal trade or profession will be treated as continuing, and any overlap relief will become due when he finally retires from the LLP, or the LLP changes its accounting date.

For Capital Allowance purposes the transfer of the business to an LLP does not give rise to a balancing event. In addition, where an LLP (or a partnership) has a corporate member, it is not entitled to the Annual Investment Allowance (see section on Capital allowances).


Anti-avoidance provisions restrict the way in which profits of partnerships and LLPs are allocated where the partners or members include both individuals and non-individuals, the latter generally being companies.

The first measure relates to LLPs only and seeks to prevent certain individuals who are members of LLPs from benefiting from self-employed status for tax and NIC purposes where the member would normally be regarded as an employee. A member of an LLP will be regarded as an employee for tax and NIC purposes where Conditions A, B and C are met.

Condition A identifies what is referred to as a “disguised salary”. Payment to the member where it is reasonable to expect that 80% or more of amounts payable by the LLP in respect of the services performed by the member is wholly, or substantially wholly fixed, or if variable the payments vary without reference to or are unaffected by the overall profits, or losses of the LLP is a disguised salary.

If the LLP agreement provides the member with a fixed amount, with, or without a bonus based on performance rather than a percentage of the overall profits, then the member is likely to be caught by Condition A.

Regular drawings on account of an eventual profit share based on a percentage of the profits are not to be treated as a disguised salary.

Condition B is that the member of the LLP does not have significant influence over the affairs of the LLP as a whole, and not just some part of the LLP. This test is more likely to affect the larger professional firms rather than small LLPs.

Condition C relates to the level of capital contribution and is met if the member’s contribution to the LLP is less than 25% of his disguised salary (as set out in Condition A) during the tax year. The capital contribution must be met throughout the tax year.

New members joining an LLP have 2 months from the date they become a member to make the contribution. In addition, there is a requirement for the new member to give an undertaking to make the payment at the time they become a member.


The second measure affects both partnerships and LLPs which have one or more members who are not individuals. Normally this would be a corporate member, and for ease of reference the non-individual member is referred to hereinafter as the corporate member.

The legislation applies where profits are allocated to the corporate member, and either condition X, or Y is met.

Condition X is that it is reasonable to suppose that the corporate member’s profit includes an amount that is in effect a deferred share of an individual member’s profit.

Condition Y considers whether the share of the profit allocated to the corporate member is excessive. This is based on whether the corporate member’s share of profit exceeds a reasonable return on capital plus an amount the company would be able to charge on an arm’s length basis for the services provided. The individual must have the power to enjoy the corporate member’s profit share, and it is reasonable to suppose that the corporate member’s profit is attributable to the individual’s power to enjoy it.

Where Condition X or Y is met the individual’s share of the profit is increased to reflect the amount of deferred profit in Condition X or the excess profit in Condition Y. The profit of the corporate member is reduced accordingly.

Where the corporate member makes a payment of the profits to the individual member, on which the individual member has already been taxed under these provisions, no further tax is charged on the individual. The corporate member is not entitled to any deduction in respect of such a payment.

In the situation where losses arise, and are allocated to the individual partners, loss relief will be denied where the loss is allocated to the individual instead of the corporate partner.

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