May 19th, 2014 / Insight posted in The Sunday Times Business Doctor

Partner may have to pay despite loss

AW writes: I have been trading through a limited liability partnership (LLP) with two partners. We have made losses for three years and expect another one this year. We have just appointed a new partner and agreed to make a payment to him. Will he be taxed on this despite the overall losses?

You must first determine if the new partner is self-employed or caught by the new LLP rules on disguised employment, writes Jon Dawson, partner at Kingston Smith LLP. The latter would require any payments to him to go through the payroll and be taxed under PAYE and be liable to class 1 national insurance.
The new LLP rules mean that partners with a fixed profit share are deemed to be employees for tax purposes unless they have significant influence over the running of the LLP or they have contributed capital of at least 25% of the fixed profit share. With a small LLP, it is easier to demonstrate that a partner has significant influence; otherwise, you should seek the capital contribution if possible.
If your new partner is deemed to be an employee, his “salary” will be taxed under PAYE and recognised as an additional cost to the LLP, increasing the overall loss of the business. He will, therefore, have to pay tax on the payments he receives.
If you can demonstrate that he is self-employed, he will be allocated a prior profit share despite losses being made by the LLP. This would increase the accounting loss allocated to the three original partners. Under the tax rules, you cannot allocate more tax losses than are actually generated by the LLP. This means that the new partner should not be taxed on his profit share, which is reduced to nil for tax purposes, and the tax losses are allocated between the other three partners.