UK LLP partnership tax loss

[jsvpm]

Good Morning

I was a junior partner in a UK LLP, and resigned in October 2014. In that tax year I had taken £75,000 in 'guaranteed' drawings (effectively salary).

I was not a designated member, had no control over the business and had just £1,000 capital in the partnership (which has been repaid to me). The senior partner had £50,000 capital and total control.

I completed my SA return and paid income tax on the full £75,000.

In tax year '14/'15 the LLP made a £30,000 profit not including drawings, so actually suffered a loss after my guaranteed drawings.

It will also make a small loss in '15/'16, and the senior partner plans to close the business. In previous years it had made substantial profits (well in excess of drawings).

The senior partner has recently explained to me that he thinks the total tax applicable to all partners cannot exceed the taxable amount in the partnership. So I have paid tax on £75k, but he thinks I should be able to get a refund and be taxed on just £30,000 (the profit in the LLP).

Further to that he wants me to forward this refund to him, to negate his losses... I assume he paid my guaranteed drawings out of his capital or from past profits (that he owned).

He also took drawings, but is going to repay them and reflect zero drawings in the accounts.

Firstly, is he right... should the HMRC refund me, even though I received £75k (and will not be paying that back)?

Secondly, should I be passing this refund on to the senior partner (or to the partnership)?

It seems odd that I can receive £75k in drawings but not pay tax on all of it, but likewise it seems odd that the partners will pay more tax in aggregate than on the profit in the LLP.

Any advice appreciated.

Thanks

 

[Becky]

Welcome to the forum!

LLPs are separate legal entities in general law, but for tax purposes an LLP is treated as transparent - ie partners are taxed on their share of the profits / losses as if they were self-employed.

I don't know what you were legally entitled to, or know the terms of your contract, so I can't comment on your personal situation. However, if you did not suffer a loss in relation to the partnership then you cannot record a loss on your tax return.

Sounds like you were a salaried partner, and the tax rules in this regard were firmed up in 2014:

http://www.bdo.co.uk/services/tax/human-capital/employer-essentials/salaried-partners

If this is the case, you should have been treated as an employee by the LLP, not as an equity partner.

 

[jsvpm]

Thanks Becky... I am not looking to record a loss, but looking to reflect taxable income of £30k, rather than £75k, due to the LLP profits only being £30k.

I had guaranteed drawings and am legally entitled to the £75k (so no issues there), and also a split of profits (if I was still there at year end), so I guess that's why I was an equity partner.

It's more whether I can claim the refund and if I'm obliged to pass that on to the partnership (or the senior partner). There is nothing in the deed or any contracts that cover this situation, so I wanted to know if there is a case with the HMRC and if I had any accounting/legal obligations to chase the refund down for the partnership.

 

[Becky]

Presumably you paid the income tax yourself, so why would you pass the refund on to the partnership? I don't know where your former partner is coming from with this, it doesn't make sense. Effectively you would be giving him your own money.

If you were legally entitled to the £75k, and received £75k, then that would be recorded on your tax return. If you were indeed an equity partner, and the partnership made a loss of £45k (being the profit of £30k less your salary) then your share would also be recorded on your tax return and it would be set against your other income. You would pay tax on the net figure. However, it is my understanding that your deductible loss would be restricted to your capital investment - so the loss would be mainly borne by your former partner, but he would get tax relief for it.

I don't quite follow how you had such a small investment in the partnership (only £1,000 capital and no control) yet were entitled to both salary and a profit share. The amount of profit / loss you are entitled to depends on the terms of your partnership agreement, and if you didn't have a formal agreement then the Partnership Act 1890 determines your legal entitlements. Obviously I don't know the details of the situation, but it seems to me that your former partner is giving you bad advice here so that he can mitigate his losses.

I only have a basic knowledge of the tax treatment of partnerships, so I would strongly recommend that you check the terms of your partnership agreement and seek professional advice about this!

 

[jsvpm]

Thanks Becky, appreciate your advice.