Partnership Tax Guide




What is a Partnership?

A Partnership is where a two or more persons commence business by carrying out an activity with a view to making a profit (a commercial basis).  There are several types of partnership:

  • General Partnership
  • Limited Partnership (LP)
  • Limited Liability Partnership (LLP)
  • Mixed Partnerships – one where there is a corporate partner

Below we set out what each partnership entails and some of the compliance and taxation requirements.


 


What is a General Partnership?

This is governed by the Partnership Act 1890 with the key characteristics similar to those of a sole trader:

  • Partners are personally responsible for their and their fellow partners debts.
  • Partners are taxed on their profits under income tax rules based on usually based on Partnership agreement.

The Partnership needs to complete a Partnership Tax Return by 31 January after the tax year their Partnership year end falls within.  Although the Partnership does not pay any taxation itself, it is required to report to HMRC a snapshot of the business and shows the individuals profit share to be included within their Self-Assessment Tax Returns.

Each Partner also needs to submit their own Self-Assessment Tax Return and pay their tax liability.

If a Partnership Tax Return is submitted after 31 January there is a fine for each partner within the Partnership, so it is important that these are filed on time.




What is a Limited Partnership (LP)?

This is governed by the Limited Partnership Act 1907.  It is not the same as a Limited Liability Partnership (LLP), although it should be registered at Companies House.  Rawlinson Pryde & Partners is a LP.  The key characteristics are:

  • At least one partner (General Partner) must have unlimited liability,
  • Limited partners’ liability is capped at their capital contribution in the event of business failure (unless there was fraud or something similar),
  • A Limited Partner is not permitted to participate in management or bind the partnership.  If they do they will be treated as a General Partner.
  • A limited partnership’s entitlement to losses is restricted pro-rata to its capital contribution.

This structure may suit a Partner who is moving towards retirement and hands over responsibilities to other Partners. As with a General Partnership it is required to complete a Partnership Tax Return for HMRC.


 
 


What is a Limited Liability Partnership (LLP)?

This is a hybrid between a Partnership and a Limited Company and is governed by the Limited Liability Partnership Act 2000 and the Companies Act 2006.

  • An LLP is a separate legal entity to its members (the partners) and can own Property in its own name.
  • LLPs have designated partners who are the equivalent to company officers.
  • LLP accounts are filed with Companies House.
  • Partners have limited liability unless:
    • The LLP becomes insolvent, and the partners knowingly allowed this to happen, in which case they may be required to repay their profits of the previous two years.
    • A partner is found to be at fault at a time when he was acting under his own personal capacity.
  • Members of an LLP are taxed like a General Partnership, so the LLP therefore needs to complete a Partnership Tax Return.
  • Losses are restricted in proportion to each Partner’s capital contribution.
  • LLPs are subject to substantial tax anti-avoidance legislation.



What is a Mixed Partnership?

This is where the partners are both individuals and non-individuals (most commonly, but not necessarily, companies) as partners.

Since 6 April 2014, anti-avoidance rules apply to mixed membership partnerships where profits are shifted from individual partners to  Corporate partners to reduce the overall tax payable. These rules apply to both partnerships and LLPs.

Where a Mixed Partnership exists it can impact on the Annual Investment Allowance for Capital Allowance claims.


 
 


Summary of Partnership Options

 General PartnershipLimited Partnership (LP)Limited Liability Partnership (LLP)
LiabilityUnlimitedPartlyLimited
Mitigate with insurance
Partnership Tax ReturnYesYesYes
Companies House FilingsNoMinimalYes

What else should I know about Partnerships?

Every Partnership should have a Partnership agreement, which would cover areas such as:

  • Profit share
  • Capital contributions
  • How to deal with the arrival and departure of a partner
  • Succession
  • Death of a partner
  • Divorce of a partner

All of the partnership options have their own slight variations on the taxation laws for Partners and the Partnership concerning (for example):

  • Income Tax Loss relief
  • Anti-avoidance laws i.e. for Salaried LLP Partners
  • Stamp Duty
  • Capital Gains Tax
  • Capital Allowances

 




 
 


Partnership Tax Guidance

If you would like to know more about which Partnership structure would suit your business needs, our accountants can be your Partnership Tax guide.  They can advise you on how to comply with the laws to ensure you do not suffer any additional taxation burden.

Please contact us by calling us on 01234 300500, emailing us at [email protected] or speak directly to one of our team and we would be delighted to assist you.