Tag: Limited Liability Partnership

Partnerships with corporate partners eligible for full expensing

Posted on by Alicia Sprott

HMRC confirmed in early 2024 that partnerships with corporate partners (also known as mixed partnerships) are now able to claim capital allowances which have previously only been available to companies within the charge to Corporation Tax.  The capital allowances are first year allowances such as full expensing.

Full expensing allows companies (and partnerships with corporate members) to immediately deduct the entire cost of qualifying capital expenditures from their taxable income, in the year of purchase. This contrasts with traditional capital allowance methods, where the cost is spread out over several years. For partnerships with corporate members, investments in assets, such as machinery, equipment, or vehicles, can result in receiving tax relief (at up to 25%) on these investments immediately, which can alleviate the cash flow issues of investment. Consequently, more funds become available for reinvestment in the business or distribution to partners.

In conclusion, partnerships with corporate members in the UK stand to benefit significantly from full expensing.

Tax implications

The implications of these tax incentives are extensive for partnerships. By encouraging investment in critical assets, the Government aims to foster business growth and competitiveness. For partnerships with corporate members, these incentives translate into enhanced financial performance and increased flexibility in capital allocation. With reduced cash flow constraints, partnerships have the opportunity to invest in innovation, expansion, or infrastructure improvements, all of which can contribute to long-term success.

However, to fully capitalise on these incentives, partnerships must ensure compliance with relevant tax regulations. This involves accurately identifying qualifying capital expenditures, maintaining thorough records, and adhering to reporting requirements set by HMRC legislation. Given the complexity of tax planning, partnerships may benefit from seeking guidance from tax professionals or accountants to navigate the intricacies of these incentives and optimise their tax strategy.

In conclusion, partnerships with corporate members in the UK stand to benefit significantly from full expensing and super-deductions. These tax incentives provide valuable opportunities for partnerships to enhance their financial position, drive investment, and contribute to economic growth. By leveraging these incentives effectively and ensuring compliance with regulatory requirements, partnerships can position themselves for sustained success in an increasingly competitive business environment.

For advice on these issues and capital allowances for partnerships generally, please contact Kiran Chotai, Private Client Senior Manager.

Salaried Members’ Rules Changes – Key Considerations for LLPs

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  •  June 26, 2024
     10:00 am - 11:00 am

LLPs must ensure they have a robust process in place and assess each member against the salaried members rules to determine the individual’s status to be taxed as an employee or as self-employed. Join our Partnerships and Employment Tax teams for an insightful webinar who will discuss the changes to HMRC’s guidance, the risks to (more…)

The importance of a partnership agreement

Posted on by Alicia Sprott

Partnerships can raise some of the following questions:

  • What happens in the event of a dispute between the members, if there is a claim made against a member or even how the business is perceived?
  • What if the members are of the same family?

There is often more than just tax and legal factors to consider, and the partnership agreement is a good starting point.

Partnership agreements

There is plenty of case law to suggest that the actual facts, actions of the parties and the circumstances can play a part in deciding whether it exists or not. Not only that, but a poorly drafted agreement may have an outcome not originally intended.

Whilst there is no requirement to have a partnership agreement, and even where an oral agreement can suffice, formalising a partnership with a documented partnership agreement has two clear advantages:

  1. Firstly, it focuses the parties’ minds on the nature of the transaction, and if the situation as to whether a partnership exists is borderline, the agreement may decide the matter.
  2. Secondly, there are sound practical reasons for putting the arrangement in writing to ensure that the subsequent business transactions are what the parties agreed to at the outset. This could include, for example, where the parties disagree on a matter, or their profit-shares may cease to reflect their continuing contribution, appointing new members or expelling disruptive members.

We should also keep in mind that in the absence of a partnership agreement, or in cases where something is not covered by one, we default to the rules as set out in the Partnership Act 1890, which may not give the results the parties intend.

Main contents of a partnership agreement

There are many points that will need to be covered and some will vary according to the type of business and the relationship between the members.

However, the agreement should be clear on whether there is a partnership and how the arrangement is to work. Some agreements run into hundreds of pages whereas others are just a few pages long. In general, factors such as how the members will share income and capital profits, what happens on the death of a member, putting restrictions on exiting partners, capital contribution requirements, and more will all need to be considered.

A small investment in legal and tax advice at inception can protect the partnership against a much more expensive battle if the parties later decide to split up. For further advice, contact Kiran Chotai, Private Client Senior Manager.

Why accounting firms are choosing LLPs over Limited companies – Accountancy Today and Accountancy Age

Posted on by Alicia Sprott

Kiran notes that this shift reflects a strategic adaptation to the UK’s evolving business landscape, where flexibility and direct tax benefits are increasingly prioritised. Above all, a firm needs to weigh up the benefits of each structure before deciding which resonates with their business model the best.

LLPs offer significant advantages, particularly in taxation and operational agility. Unlike LTD companies where profits are taxed both corporately and on dividends, LLPs enjoy a tax-transparent status, meaning profits are only subjected to income tax as they are earned, not when distributed. LLPs also inherently promote a more integrated business operation, with members engaging directly with clients and sharing in the firm’s administration and profits. This contrasts with LTD structures, where directors manage operations and shareholders are often removed from daily business engagements.

The process of transitioning however requires careful planning, including drafting an LLP agreement and transferring contracts under compliance with employment laws. In short, Kiran comments: “There are pros and cons for accountancy firms looking to become an LLP, but given the nature of our industry, the benefits of becoming an LLP can far outweigh the challenges.”

You can read Kiran’s article in full via Accountancy Today here and via Accountancy Age here.

Strategic tax advice for LLPs

For firms considering this move, the decision between an LLP and an LTD structure should align with long-term business goals and operational philosophies. The inherent flexibility and direct engagement offered by an LLP can be crucial for firms looking to enhance client relationships and agile management practices in a dynamic professional landscape.

For further advice on transitioning to an LLP, please contact Kiran directly.

Transitioning from employee to partner

Posted on by Alicia Sprott

Employment status

As an employee, you are taxed on the income received each month (or other agreed period), with Income Tax and NI deducted at source through the payroll under Pay As You Earn (PAYE). As a partner, you are taxed on your share of the profits of your partnership, based on your agreed profit-sharing ratio. This may differ from your drawings.

When you become a partner however, you will be required to file an annual Self-Assessment tax return and are likely to be required to make tax payments on account, twice a year:

  • On 31 January (within the tax year)
  • On 31 July (after the tax year ends)

Each payment on account is usually 50% of the previous tax year’s liability. In addition, a balancing payment may be due on 31 January following the end of the tax year.

National Insurance Contributions

As an employee, you are subject to Class 1 National Insurance Contributions (NICs). In 2024/25, the rate for earnings between £12,570 per year and £50,270 is 8%, with earnings in excess of £50,270 at a rate of 2%. Your NICs are deducted from your salary by the employer.

However, as a partner, from 2024/25, you will be subject to Class 4 NICs. It is also possible to pay Class NIC, voluntarily.

For 2023/24, Class 4 NICs are paid at 6% on your annual taxable profits between £12,570 and £50,270, and a further 2% on profits over £50,270.

During the year of transition, you are likely to have paid Class 1 NICs on your employment income. Where an individual is both employed and self-employed in a tax year, the ‘annual maxima’ is calculated to allow for relief for the individual who is essentially paying Class 1 and Class 4 NICs in one year.

Benefits and expenses

Any benefits you receive as an employee are either reported through payroll or via a P11D form. Any benefits you receive as a partner are disallowed within the firm’s tax computation, therefore no tax relief is obtained.

As an employee, your employer would normally reimburse business expenses on the basis that the expense is directly related to your employment. When you become a partner, it is similarly important that all business expenses are accounted for in the partnership’s annual tax return.

Pension

As an employee, you are usually part of the workplace pension and employee contributions are complemented by the employer’s contributions. As a partner, you are solely responsible for your own pension and there are no employer contributions. It should be noted that in the year of transition, caution should be taken as you will need to ensure you do not exceed the pensions annual allowance. Pension contributions in excess of the annual allowance of £60,000 can result in a tax charge at your marginal rate (up to 45%). This allowance is reduced for higher earners.

Registering as a partner

To begin the transition to a partner, an SA401 form should be completed by the individual joining the partnership.

If you would like to discuss your transition from employee to partner in more detail, please reach out to Kiran Chotai, Private Client Senior Manager, or your usual haysmacintyre contact.

Have you thought about transitioning your practice from Ltd to LLP? AAT Comment

Posted on by Katie Trower

In the past, accounting practices typically operated as traditional partnerships, with a significant number transitioning to Limited Liability Partnership (LLP) status over the last 23 years. Most of the top 100 practices are structured as partnerships. Limited company setups are often associated with acquisitions by private equity firms.

However, transferring a business from a limited company to an LLP is not straightforward. It usually involves closing one entity and establishing another, which carries its own legal and tax considerations. Despite the complexities, there are substantial advantages to making this transition.

You can read the article in full via AAT Comment here.

Our Partnerships service

Our Partnerships team are on hand to advise on the transitioning of your practice. Contact Kiran to discuss your needs in more detail.

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