Limited liability partnerships (LLPs), often described as being a ‘hybrid’ combining features of both partnerships and corporations, allow two or more individuals to own and operate a business together while limiting their personal liability.
LLP vs Company
In a traditional general partnership, profits (or losses) are allocated to the partners in accordance with the agreed profit-sharing ratio. Each partner is personally liable for the actions, debts, and liabilities of the partnership. This became problematic, especially in large professional firms as they grew and expanded internationally. If one partner committed malpractice, all partners could be held financially responsible. These situations underscored the need for a business structure that protected individual partners from the negligence or misconduct of others.
By contrast, a company is a separate legal entity such that the owners or shareholders are only responsible for the company’s debts up to the amount they invested in the business. Therefore, in the event of liquidation or litigation, shareholders should be liable for no more than the face value of their share in the company. In practice, HMRC uses powers such as personal liability notices to hold directors personally liable for the non-payment of PAYE or National Insurance contributions. These notices are issued when HMRC believes that the non-payment was a result of the director’s neglect or fraudulent behaviour.
Limited Liability Partnerships Act 2000 introduced LLPs as corporate bodies, blending elements of partnership and company law. A limited company, connected with the individual members, can be introduced as a partner which gives LLPs flexibility, including the ability to allocate a greater income profit share to the company, on which it may pay a lower rate of tax than the individual members. This flexibility has created various tax planning opportunities, some of which have been restricted by anti-avoidance legislation.
Taxable Loan?
With the introduction of LLPs, partners or members (or their associates) saw the opportunity to extract value from the company by lending to the LLP itself and withdrawing monies indirectly, the argument being that the loan was not made to a participator personally.
However, when a close company makes a loan or advance to a partnership (including an LLP) in which all the partners or members are relevant persons and at least one of the partners or members is a participator in the company, the other partners or members are considered associates of a participator. Consequently, the loan is treated as being made to relevant persons and the loan or advance falls within the tax charge provisions in CTA 2010, s 455 (see HMRC’s Company Taxation Manual at CTM60150).
Example: Company loan to LLP ABC Ltd is a close company in which Alicia and Bob are equal shareholders. They also form an LLP, called AB Ventures LLP, the three members being Alicia, Bob’s wife, Carol and Bob’s adult son, David.
ABC Ltd extends a £200,000 loan to AB Ventures LLP to support a joint business idea (buying a commercial property). Although the loan is not made directly to Alicia or Bob, all LLP members are either participators (Alice) or associates, and at least one is a participator (Carol and David are associates of Bob, who is a participator).
Should the loan remain outstanding nine months and one day after the end of the accounting period, the company must lodge an amount equal to 33.75% of the outstanding loan with HMRC as if it were an amount of corporation tax. The rule applies as the loan is treated as being made to a participator. ABC Ltd must pay a section 455 tax charge of £67,500.
Practical Tip
A section 455 charge may become an issue where an LLP and a close company are run closely, sharing services. Commercially based loan arrangements can also be caught (e.g., where a loan is made by a ‘related’ close company to a property development LLP to fund a new development) since there is no ‘commercial purpose’ exemption within the legislation