Is now the time for LLP’s to incorporate?

The topic surrounding the ever present discussion on whether to structure a business via an LLP or a Limited company for tax planning purposes, has further light shed on it following a recent report. Incorporation could in fact be the mechanism for all partnerships to consider! Read the broad facts and figures here and consult your accountant to make sure you are maximising tax savings if you currently trade as an LLP.

With evidence that there is a recurring imbalance in the distribution of LLP’s profits between partners, HMRC are looking at ways to ensure that tax is levied fairly whether their “arm” of the LLP trades as a limited company or an individual. Thanks to the mechanism currently allowing partners of an LLP to trade as an individual partner or as a limited company partner in their own right, means that those choosing the limited company option, can benefit from significant tax savings. Time and time again, HMRC see that a greater proportion of LLP profits are allocated to the limited company partners and an effective rate of tax between 20% and 30.50% applies, depending on if dividends are drawn. In comparison, profits allocated to individual partners can have to bear the brunt of a tax bill up to 47%, being the maximum 45% rate of income tax + 2% NIC. If HMRC conclude a way to level this out, the question really comes into play as to what the remaining advantages are of trading as an LLP.