Making Tax Digital for VAT: A reminder
We have specialist knowledge and experience to advise on restructuring a Limited Liability Partnership (LLP). We can also advise you and your members on the associated financial and tax consequences.
Our licensed insolvency practitioners provide assistance to financially distressed and solvent LLPs. We understand the unique issues which arise from the structure of an LLP and the potential complexities of financing arrangements between members of an LLP and the LLP itself.
The Limited Liability Partnerships Act was enacted in 2000 and created the legislation through which partners in a business could benefit from limited liability.
Whereas a Limited Liability Partnership (LLP) is a corporate entity, the profits and losses of the LLP are shared by its members who are responsible for their own tax liabilities arising from their participation in the LLP. This can make LLP structures and financing arrangements between members of an LLP and the LLP quite complex.
When an LLP faces financial difficulties, it is important to understand the consequences of a cessation of the LLP’s trade, both upon the LLP and on its individual members. If there is a members’ agreement, this will provide some guidance. If there is no members’ agreement, there are regulations which will apply. Where the business of the LLP is viable, we can advise on the most appropriate way in which it may be restructured. Insolvency legislation applicable to companies in relation to Administration and Company Voluntary Arrangement, can be used (with some variations) to rescue the LLP’s business as a going concern. An Administration for the LLP has the benefit of a moratorium, preventing creditors from commencing or continuing with any legal proceedings against the LLP and, in so doing, creates the opportunity to sell the LLP’s business as a going concern, should this be appropriate.
Insolvency legislation covering Creditors’ Voluntary Liquidation, Members’ Voluntary Liquidation and Compulsory Liquidation also applies to LLPs, with some minor variations. If the LLP’s business is not viable, or the LLP has ceased its trading activities and the members agree that it should be wound up, then we can provide specialist advice.
Whereas an LLP’s financial viability may be improved through restructuring, it is paramount that the impact of the proposed restructuring on the members, and the tax consequences, be considered in detail. A member’s drawings from an LLP are in anticipation of profit and until profits are allocated to each member. In addition, a member’s drawings are repayable (unless the member is owed money by the LLP, or the members’ agreement states otherwise). Where an LLP is in financial distress and is in need of restructuring, it is likely that the LLP has made losses and will have no profit to allocate to members. If so, the extent to which the members owe the LLP must be evaluated as part of the restructuring programme. Furthermore, as the members are individually taxed on their share of the profits and losses, as appropriate, the members’ liability to tax should also be established as part of the restructuring programme.
It is important to appreciate that the LLP itself is not subject to tax on its profits and losses unless it ceases to be active or is placed into liquidation – then it is taxed as a company. This may have a significant impact upon the tax liability of the LLP’s members, for example, loans to members attract a tax liability at 25%, benefit in kind rules may apply e.g. to members’ cars etc. However, there may be some mitigation for tax arising on capital gains, as assets gifted to an LLP are rebased on liquidation, i.e., they are deemed to be held within the corporation tax regime at market value on the date of acquisition. Consequently, the restructuring programme should identify the tax arising on profits or losses to be realised after the LLP is placed into liquidation.
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