A consultation document has been published on an HMRC attempt to stop what they believe are artificial profit and loss allocation schemes involving members of LLPs (and indeed other partnerships) where some of the members are chargeable to income tax but others are not.

What they do not like is allocating to a limited company member of the partnership a greater share of the partnership profits than is justified, so as to take advantage of the fact that an individual pays tax at an effective top rate of 47% (45% + Class 4 NICs at 2%) whereas for a limited company it will often be only 20% if the profits are kept in the limited company, or 44.44% if they are paid out as a dividend (20% corporation tax plus income tax on the balance of 80% which is then effectively taxed at 30.55%).

With all limited companies at whatever profit level due to enjoy a 20% rate of corporation tax from April 2015 (and only 1% more than that from April 2014), it really begs the question as to whether there is any tax advantage in operating as a partnership. Incorporation for all partnerships could well be the way ahead, which will not be what the Treasury was looking for!


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