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Tax impact of LLP move

Switching from an LLP to a limited company structure raises many tax questions, a recent meeting of the Croydon and South East London tax discussion groups hears.

September 2018

The query concerned the incorporation of a limited liability partnership (LLP) as a limited company. The accountant involved had a client who had been operating for a number of years as an LLP, but due to its increasing profitability the client wished to operate via a limited company.

The client had drawn up a bu siness plan which indicated that the partners would be subject to considerable personal tax costs from the retained profits needed to grow the business. The discussions in the tax discussion group concerned:

  • the nature of the business
  • the amount that the partners wished to draw from the business each month
  • the different tax treatments for motor cars between a self-employed business and those for a limited company 
  • the trade off between the tax and National Insurance on dividends and salary 
  • the ease that a new partner could be introduced to the business with an interest in the LLP’s profits when contrasted with the Employment Related Securities legislation on the issue of a share to an employee/shareholder.
  • the timing of the cessation which would crystallise the end of the accounting period for personal tax.

There was also a discussion regarding the tax relief on the transfer of the business to the new limited company:

  1. The Transfer of A Going Concern legislation, which should provide exemption from VAT on the transfer of the business assets to the limited company
  2. Incorporation relief under s162 TCGA1992, which provides automatic tax relief on the chargeable assets being disposed of by the partnership or
  3. Gift of Business Asset holdover relief under s165 TCGA1992 which provides relief on the chargeable  assets being disposed of by the partnership if the conditions needed to meet the automatic relief under s162 TCGA 1992 are not met.
  4. SDLT relief on the transfer of partnership assets to a connected party where no beneficial interest changes have arisen.
  5. Tax election for the capital allowances on the transfer of eligible plant and machinery, integral fixtures and fittings as well as other qualifying expenditure between connected parties.

The combination of the above tax relief should mean that the tax consequences of the actual disposal are likely to be minimal, if the incorporation is properly planned. There would, however, be considerable commercial impact from the transfer of the business contracts to the limited company.

Each month (with the exception of July and August) the Tax Discussion Groups [TDG] in Croydon and South East London meet to discuss client tax issues on a no-names basis. These meetings are free to attend and normally cover over a dozen tax issues raised by those attending.

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