20 December 2022
Limited Liability Partnerships (‘LLPs’) have been around since the early 2000s. Their use since 2000 has grown significantly due to a number of tax benefits these structures provide in the right circumstances and LLPs can now be found across most industries and professions.
An LLP is a corporate structure. As the name suggests, the owners of an LLP, known as LLP members, have limited liability like the shareholders of a company. However, for tax purposes the individual LLP members are taxed like sole traders/partners on their profits, and the LLP itself does not pay corporation tax. This differs significantly to a company where the directors/shareholders are taxed on what they extract, usually a mixture of salary and dividends, while the company pays corporation tax on its profits.
The tax treatment of LLP members provides interesting opportunities for new and existing businesses, although certain anti-avoidance provisions may apply in specific circumstances to prevent exploitation of the differing tax treatment of partners and employees. A key difference between the taxation of salaried income and the taxation of profits allocated to LLP members is that LLP profits suffer Class 4 National Insurance contributions (NICs) rather than the Class 1 NICs which are paid on employment income. The NICs saving of receiving LLP profits rather than a salaried income can therefore be substantial, as not only is the main rate of Class 4 NICs less than that for employees Class 1 NICs, but there is a further 13.80% saving, as no employer’s NICs are payable on LLP profits.
Secondly, the LLP members only pay tax on the taxable profits of the LLP. It therefore follows that, where the business is loss-making (as is often the case with new start-ups), there is no tax to pay on the accounting profits they are allocated.
Finally, if there are taxable profits, instead of having to pay the tax and NIC to HMRC every month as part of the business’s payroll, the LLP members are in self-assessment and the tax for the first year is not payable until the 31 January following the first tax year the LLP has traded. This can present a significant cash flow advantage for new start-ups where cash is often king in ensuring ongoing operations.
There are many other benefits to trading as an LLP, the value of which will depend on the business. A common favourite is that LLP members do not have benefits in kind. This can give rise to a significant saving for cars provided by the business to LLP members, particularly where the cars have high carbon dioxide emissions. Instead of paying tax on the car’s benefit in kind, the LLP will instead acquire the car with its post-tax profits, receiving a tax deduction for the business use percentage of the vehicle costs only.
LLPs are not the answer for every business. For example, businesses with high retained profits may be better operating as a company and only paying corporation tax at a rate of up to 25% from April 2023 on the profits (although this can be remedied by transferring to a company when the LLP starts becoming very profitable). However, with the significant increases in both corporation tax and tax rates on dividends in recent years, there are ever increasing examples of businesses that would achieve significant tax savings if they were trading as LLPs.