Types of UK entity – Limited Liability Partnership (LLP)

Under the UK’s Limited Liability Partnerships Act 2000, a Limited Liability Partnership (LLP) is treated in the UK as a separate legal entity, but the profits of its business are taxed as if the business were carried on by partners in partnership, rather than by a body corporate.

In general, a Limited Liability Partnership (LLP) is a hybrid form of business entity that combines elements of a limited company and an ordinary partnership that offers limited liability, organizational flexibility, and tax transparency to its members.

A LLP agreement is not mandatory, though highly recommended and may be created by its members according to their own specific needs.

Registration

The UK government agency responsible for the incorporation and registration of entities is the Registrar of Companies, and the company registry is commonly known as ‘Companies House’ http://www.companieshouse.gov.uk

A LLP must be registered at Companies House as part of the process of incorporation. The information about LLPs is held on the public register, which is available for anyone to see. Please note that the LLP agreement is an internal document and will not be held on the public register.

A UK Limited Liability Partnership (LLP)

A LLP has a pass-through tax structure or is seen as ‘tax transparent’ which shifts the tax burden of the LLP to its members, enabling the LLP to bypass UK taxation requirements.

A LLP is not seen as a separate entity for tax purposes, which means that the LLP itself will not be liable for tax on profits or gains arising within the LLP, but the profits or gains will be assessed to tax separately on the individual partners. Any non-UK source profits or gains made by an LLP will not be subject to UK tax unless the members are UK resident individuals or corporate bodies.

There are no restrictions on the residence or nationality of the members of a LLP and therefore, if the members of the LLP are non-resident and the income of the LLP is non-UK source, the members will not be subject to UK tax. It is therefore possible to have a LLP set up in such a way as to not be liable to any UK tax. The member’s exemption from UK tax is only applicable provided that no business or trade is carried out with or within the United Kingdom.

A LLP gives businesses many advantages including a extremely flexible structure, limited liability for its members, and minimal corporate formation requirements.

The choice of LLP’s financial year is entirely up to the LLP. The financial year in the UK is usually expressed by stating the year-end date; the most common financial year in the UK is the year-end 31 March (April to March). However, most international organisations choose the year-end 31 December (January to December).

Registration of LLPs

The registration requirements for a UK LLP are very similar to a UK company. Registration documents must be submitted to Companies House for review and approval, prior to incorporation being effected.

A LLP can be setup (incorporated) to run a business with 2 or more members. A member can be a person, another LLP or a company, known as a ‘corporate member’.

The documents that must be filed at Companies House are:

  • A statutory registration form providing, among other things, the proposed name of the LLP, the registered office address and the details of the members. The LLP must have at least 2 designated members. From June 2016, the identity of any individual(s) with significant control (whether direct or indirect) over the LLP in order to disclose, for transparency purposes, who controls the LLP or, ultimately, the wider group that it sits within.

On registration, Companies House issues a certificate of incorporation, showing the LLP’s registered name and its unique registration number. The LLP is then formally incorporated.

Continuing obligations of a UK LLP

Once registered; the LLP is subject to various ongoing obligations. These include requirements to:

  • Maintain a registered office.
  • Notify Companies House of any statutory changes, including the appointment/resignation of members, changes in their personal details and changes to the LLP’s name.
  • Submit an annual confirmation statement to Companies House (containing, among other things, details of the LLP’s registered office address and its members). Note that the annual confirmation statement has replaced the annual return with effect from June 2016.
  • Prepare and submit annual Statutory Financial Statements (accounts) to Companies House.

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UK TAXATION

A LLP is not considered to be a separate entity for taxation purposes and thus is not subjected to corporation. A LLP is treated as a partnership in that each member is liable to pay his own income tax based on the share of the profits.

Members of an LLP, who are not residents in the UK, are only liable to pay income tax upon the earnings made within the UK.

A UK LLP, whose members are not resident of the UK and do not carry business within the UK, are not liable to pay local UK taxes. Members normally need to pay taxes in the country of their residence.

LLP tax filing requirements

A UK LLP must provide HMRC with certain initial information within three months of starting up in business.

Even though, a LLP is not considered to be a separate entity for taxation purposes and thus is not subjected to corporation or income tax, it still needs to submit a LLP tax return every year. LLP tax return is normally filed electronically, with financial statements of the LLP.

HMRC charges penalties for late filing.

PAYE and NICs

The UK operates a tax withholding system called PAYE. It is the employer’s or UK host employer’s responsibility to report PAYE information, as well as deduct tax from the employee’s income and remit the funds to HMRC.

In addition, certain ‘benefits’ enjoyed by the employees are subject to income tax, such as the private use of a LLP owned car and LLP payments for private medical insurance. In addition to the annual statement of gross pay and tax deducted (P60) the employer must also provide the employee with a statement of the benefits provided from which tax was not deducted, as notified to HMRC on the P11D.

VAT

VAT is the UK’s sales tax. Goods and services that are subject to VAT are known as taxable supplies. Non-taxable supplies may either be VAT exempt or outside the scope of UK VAT.

The VAT rate applicable depends upon the goods or services you supply. The standard rate in the UK is currently 20% and is applied to most taxable goods or services.

Registering for VAT

A business must register with HMRC if the value of its sales of taxable supplies exceeds a minimum threshold level. This level is currently £85,000 in any 12 month period.

  • A business must register for VAT if at any time it expects its taxable supplies to exceed the threshold in the next 30 days alone. In addition, due to a special rule called the reverse charge, a business can exceed the threshold as a result of services bought in from suppliers outside the UK.
  • A business that has not exceeded the threshold (and is not required to register) may register voluntarily for VAT.
  • Where it is known that taxable supplies will be sold at some point in the future, it is possible to register as an ‘intending trader’. This will enable the entity to recover VAT on purchases made wholly for business use.

Charging VAT on sales
Businesses that are registered for VAT must charge tax on the taxable supplies that they sell, at the appropriate rate. The standard rate of VAT is currently 20%, but some goods and services are taxed at a different rate.

Reclaiming VAT on purchases
Businesses registered for VAT may also reclaim the VAT that they have paid on purchases of taxable supplies from other VAT registered businesses. However, if the business makes exempt supplies there is a restriction on the amount of VAT on purchases that it can recover.

Other tax considerations

Transfer pricing
UK transfer pricing rules require that transactions between affiliates should be conducted on an arm’s length basis. This means that the pricing of transactions between them should be the same as if the two affiliates were completely independent from each other.

The rules equally apply to UK-UK transactions.

Where transactions between affiliates are not made on an arm’s length basis, an adjustment to the prices may be required for tax purposes.

Base erosion and profit shifting (BEPS)
Base erosion and profit shifting (BEPS) refers to corporate tax planning strategies used by multinationals to “shift” profits from higher-tax jurisdictions to lower-tax jurisdictions, thus “eroding” the “tax-base” of the higher-tax jurisdictions. The Organisation for Economic Co-operation and Development (OECD) define BEPS strategies as “exploiting gaps and mismatches in tax rules”.

The Base Erosion Profit Shifting (BEPS) regime was the international communities’ response. The outcome of the Action Plan included changes to international tax rules, such as Double Tax Treaties and the OCED’s Transfer Pricing Guidelines, and also recommendations from the OECD for tax legislation that should be adopted by countries in their national tax law.

In the UK we have seen a number of new measures introduced. However, to properly comply with the new rules, it often requires detailed knowledge of the overall group position, including how other group members (both UK and overseas) treat certain items for tax purposes.

FREQUENTLY ASKED QUESTIONS (FAQs)

If you cannot find an answer to your question, please get in contact with us.

Who can form a Limited Liability Partnership (LLP)?
The Limited Liability Partnership Act 2000 generally allows two or more persons (natural persons or corporate bodies) associated for the purpose of carrying on a lawful business with a view to make profit to form a LLP. There is no requirement for a member (partner) to be a UK resident.

Is LLP a separate legal entity?
Yes, a LLP is an alternative corporate business entity that gives the benefits of limited liability (like a company) but allows its members the flexibility of organising their internal structure as a traditional partnership.

Who will be liable for the LLP?
The LLP will be a separate legal entity and while the LLP itself will be liable for the full extent of its assets, the liability of the members (partners) will be limited.

Does a LLP have a constitution in the form of Memorandum and Articles of Association like a company?
No, the Limited Liability Partnerships Act 2000 does not impose a structure for the management of a LLP. There is no statutory provision for general meetings, directors, company secretary, share allotments, etc. As with the existing common law partnership, these are matters for the partnership agreement which we recommend you have drawn up.

Is there a requirement for a LLP agreement?
No, there is no requirement for a LLP agreement. However it is highly recommended and may be created by its members according to their own specific needs.

Is there a minimum registered capital requirement?
There is no minimum registered capital required and the capital can be in any currency.

Is there any restriction placed on business activities of a LLP?
Specific categories, which include banking, insurance, financial services, consumer credit related services and employment agencies would need to be licensed by relevant authorities. In addition, a LLP is not able to undertake non-profit making activities.

What is the minimum of designated members a LLP requires?
Every LLP must have at least two, formally appointed, designated members at all times. If there are fewer than two designated members then every member is deemed to be a designated member. The LLP may itself decide that all members will be designated members or that only some members will be designated members.

What is the difference between a member and a designated member?
With the agreement of the other members, a member may become a designated member at any time. Designated members have the same rights and duties towards the LLP as any other member. These mutual rights and duties are governed by the LLP agreement (which is recommended) and the general law. However, the law also places extra responsibilities on designated members. In particular, designated members must:

  • register the LLP for Self Assessment with HMRC – you must also register separately as an individual
  • register the LLP for VAT if you expect your business’s sales to be more than £85,000 a year
  • appoint an auditor if needed
  • keep accounting records
  • prepare, sign and send annual statutory financial statements to Companies House
  • send a confirmation statement (previously annual return) to Companies House
  • tell Companies House about any changes (for example, to the registered name or address, or members)
  • act for the LLP if it’s wound up and dissolved

Designated members can be prosecuted if they don’t meet their legal obligations.

How is a LLP taxed?
A LLP in the UK is treated as ‘tax transparent’ for tax purposes: i.e. the members (partners) are liable to tax for their share of the profits, and to capital gains tax in respect of any gains made on the disposal of partnership assets.

Any non-UK source profits or gains made by a LLP will not be subject to UK tax unless the members are UK resident individuals or corporate bodies. There are no restrictions on the residence or nationality of the members of an LLP and therefore, if the members of the LLP are non-resident and the income of the LLP is non-UK source, the members will not be subject to UK taxation. It is therefore possible to have a LLP set up in such a way as to not be liable to any UK tax. The member’s exemption from UK tax is only applicable provided that no business or trade is carried out with or within the United Kingdom.

Do LLPs benefit from Double Tax Treaties (DTTs) in the UK?
The UK is party to more DTTs than any other sovereign state. However, access to treaty benefits for UK LLPs is determined by the residence of members. A LLP with overseas members cannot generally avail themselves of treaty benefits as a result of the LLP’s tax transparent status. In determining residence status a LLP would be deemed resident in the jurisdiction from which it is controlled, which would ordinarily be the jurisdiction in which its members (partners) are situated.

What are the top uses of a UK LLP?

  • International trade
  • International professional services
  • International commercial activities
  • Estate planning
  • Investment vehicle
  • International holding entity
  • Tax planning vehicle

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