Partnerships: Limited Liability Partnership (LLP): taxation
S863 Income Tax (Trading and Other Income) Act 2005, S1273 Corporation Tax Act 2009
Although in general law a LLP is regarded as a body corporate, for tax purposes a LLP is normally treated as a partnership.
Where a LLP carries on a trade, profession or other business with a view of profit:
- all the activities of the LLP are treated as being carried on in partnership by its members (and not by the LLP as such)
- anything done by, to or in relation to the LLP for the purposes of, or in connection with any of its activities is treated as done by, to or in relation to the members as partners and
- the property of the LLP is treated as held by the members of the LLP.
Except as otherwise provided, in the Tax Acts:
- references to a firm or partnership include a LLP to which the above rules apply
- references to members or partners of a firm or partnership include members of such a LLP
- references to a company do not include such a LLP, and
- references to members of a company do not include members of such a LLP.
Most LLPs are transparent for tax purposes and each member is charged to Income Tax or Corporation Tax on their share of the LLP’s income or gains as if they were members of a general partnership governed by the Partnership Act 1890.
It follows that where a LLP carries on a business with a view of profit it is treated as a partnership in respect of all of its activities, including any activities which are not carried on with a view of profit.
It is the persons who are registered as members of the LLP who carry on the business. If a LLP carries on a trade then each registered member is taxable on the income they derive from the LLP as trade profits notwithstanding the fact that the registered member may have been a salaried partner (an employee) in a predecessor general partnership.
For those members chargeable to Income Tax, their share of the LLP’s profits to be charged to tax is calculated in accordance with the rules set out in BIM82200 onwards - and for those members chargeable to Corporation Tax in accordance with the rules set out in CTM36500 onwards.
There are two exceptions to the normal rule. These are where:
- the LLP does not carry on a business with a view to profit, or
- the LLP is in liquidation or is being wound up by the order of the Court.
In these circumstances the LLP is regarded as a body corporate for the purposes of the Tax Acts and will itself be chargeable to Corporation Tax on its taxable profits or gains.
- the LLP only temporarily ceases to carry on a business with a view of profit, or
- the LLP is being wound up, and
- the period of the winding up is not unreasonably prolonged, and
- the winding up is not connected in whole or in part with the avoidance of tax,
the LLP will continue to be regarded as a partnership, that is as transparent, for the purposes of the Tax Acts.