- Project plans
- Project activities
- Legislation and standards
- Industry context
Last edited 30 Jul 2014
Many professionals working in design and construction have established themselves as a Limited Liability Partnership (LLP) and some of these may be 'mixed partnerships'. This means that the members of the LLP are both corporate and individual members.
It is perfectly permissible for a company to be a member of a LLP and there are a variety of reasons why it may be considered appropriate or necessary for such an arrangement to be put in place. For example a corporate member could be the provider of much needed capital to a LLP, or it could be a provider of very specific services which could be of benefit to the LLP’s clients.
HM Revenue & Customs (HMRC) however, view the existence of mixed partnerships rather differently and believe there is a significant loss to the exchequer through the use of such arrangements to avoid or, at the very least defer, the payment of tax and national insurance contributions (NICs).
So, with effect from April 2014 new legislation is being implemented which will have significant financial repercussions for any LLPs which have corporate members. In particular the new rules will target those corporate members who are controlled by or associated with individual members and which are allocated profit shares that are deemed 'excessive' by HMRC.
To understand this more fully some brief examples are provided:
 Example A
UK Building LLP makes a profit of £200,000 to 31st March 2013 and has three members: Tom, John, and ABC limited. The profits are allocated equally to Tom and John (£100K each) and none to ABC Limited. In this scenario Tom and John will both pay around £34,200 in tax and National Insurance (based upon 2013 tax year parameters, and assuming the single person’s tax free allowance).
 Example B
UK Building LLP makes a profit of £200,000 to 31st March 2013 and has three members: Tom, John, and ABC limited. In this example however, £80K of the profits are allocated equally to Tom and John (£40K each) and £120K to ABC Limited. In this scenario Tom and John will both pay around £9,000 in tax and National Insurance (based upon 2013 tax year parameters, and assuming the single person’s tax free allowance), and ABC Limited will pay £24,000 in corporation tax, assuming no deductible expenses within ABC Limited.
So the total tax take is £68,400 in Example A but only £42,000 in Example B
This simple analysis does not explain the whole story as further tax would be payable on income taken from ABC Limited either in the form of salary or dividends but in the event that no such income is taken or is deferred to a much later date, it is clear that there is a cash flow detriment to the Exchequer. At worst, there is a clear loss to the Exchequer in the event that when income is taken from ABC Limited it is taken by a standard rate taxpayer in lieu of the higher rate of tax being paid by John or Tom.
 Changes implemented by the Finance Bill
- A non-individual has a share of the firm’s profit.
- The non-individual’s share is excessive.
- An individual partner has the power to enjoy the non-individual’s share or there are deferred profit arrangements in place, and;
- It is reasonable to suppose that the whole or part of the non-individual’s share is attributable to that power or arrangements.
These proposals will affect all mixed partnerships regardless of their rationale. Those that have a sound commercial basis for their structure will be affected just as those which exist for tax saving purposes alone.
It is likely that many LLPs will opt to incorporate, but for those LLPs for whom this in neither desirable nor a viable option the matter of profit allocation with effect from April 2014 will become fraught with adverse consequences if these new rules are triggered.
This article was written by:--Martinc 12:35, 20 February 2014 (UTC)
 Related articles on Designing Buildings Wiki
Featured articles and news
Book review – a series of essays about architecture and urbanism in the British Empire.
The complex situation where events occur at the same time.
How can Latin America and the Caribbean unlock the digital potential of their new and existing built environment?
CIOB publish a new code of estimating practice.
These relate to a programme where each activity is allocated a price and interim payments made against completion.
Police testing finds that flat door could only withstand fire for half its designed time.
Have a look at these images from a new photography book of buildings being reclaimed by nature.
What does the phrase 'demised premises' mean? Find out here in our introductory article.
New good practice guidance looks at the best way to deliver multi-functional solar car parks.
Philip Hammond suggests the public finances have reached a turning point.
Support grows for the Construction (Retention Deposit Schemes) Bill.