Contracting - Ltd Vs LLP
Discussion
I'm an IT Contractor and have used various different umbrella companies and schemes, but moved a couple of years ago to my own Ltd company. An accountancy firm have spoken to me a number of times over the last few weeks telling me how wonderful Limited Liability Partnerships are and demonstrated with my current daily rates how much better off I'd be.
I'm a firm believer that if it sounds too good to be true, then it probably is so I want to know where the catch is? From memory, they demonstrated that if I use their services and an LLP, I keep about 85% of my contract value. I've looked about online and I haven't found that much useful information and had been provided by people who don't understand what LLP is.
Does anybody here use an LLP or more specifically moved from an Ltd to an LLP?
I moved from an off-shore scheme to a Ltd mainly (apart from it becoming illegal) because of the constant fear of HMRC coming knocking. I'm happy to sail as close to the wind as I can as far as I can push when it comes to lowering my tax liability but I'm not prepared to do anything slightly dodgy or that would get HMRC on my back!
I'm looking at a Nissan GTR later, so the extra money left in the kitty each month would be useful but i'm not prepared to put up with that horrible pang each and every time the small brown envelope comes through the door
I'm a firm believer that if it sounds too good to be true, then it probably is so I want to know where the catch is? From memory, they demonstrated that if I use their services and an LLP, I keep about 85% of my contract value. I've looked about online and I haven't found that much useful information and had been provided by people who don't understand what LLP is.
Does anybody here use an LLP or more specifically moved from an Ltd to an LLP?
I moved from an off-shore scheme to a Ltd mainly (apart from it becoming illegal) because of the constant fear of HMRC coming knocking. I'm happy to sail as close to the wind as I can as far as I can push when it comes to lowering my tax liability but I'm not prepared to do anything slightly dodgy or that would get HMRC on my back!
I'm looking at a Nissan GTR later, so the extra money left in the kitty each month would be useful but i'm not prepared to put up with that horrible pang each and every time the small brown envelope comes through the door
On the whole, I would say that a limited company offers better tax options than an LLP.
An LLP is a partnership and the individual is taxed on their personal share of the partnership income. They are also liable to Class 4 NI on that share of the profits too. It works more or less the same way a sole trader pays income tax and Class 4 NI - with the added complication that the partnership has to submit its own partnership self assessment tax return each year.
The one area where a partnership MIGHT work out more beneficial to an individual is the tax treatment of "company cars". In a limited company, a car owned by the company will be taxed on the director through the PAYE Benefit in Kind system. In a partnership (or sole tradership), the PAYE system (and related BIK system) does not apply to the partners or sole trader so the taxation of the personal use of the car can work out more beneficial.
However, to my mind, if a person is making an important business decision on the basis of how company cars are taxed, I would suggest they have their business priorities slightly askew.
Note also that IR35 can be applied to both limited companies and partnerships, so an LLP is not a guarantee against IR35 being an issue.
Finally, to set up a limited company, only one person is now required.
For a partnership, at least two individuals need to be "partners" in the enterprise. So, you would need to organise another individual who would be willing to be your business partner if setting up an LLP.
An LLP is a partnership and the individual is taxed on their personal share of the partnership income. They are also liable to Class 4 NI on that share of the profits too. It works more or less the same way a sole trader pays income tax and Class 4 NI - with the added complication that the partnership has to submit its own partnership self assessment tax return each year.
The one area where a partnership MIGHT work out more beneficial to an individual is the tax treatment of "company cars". In a limited company, a car owned by the company will be taxed on the director through the PAYE Benefit in Kind system. In a partnership (or sole tradership), the PAYE system (and related BIK system) does not apply to the partners or sole trader so the taxation of the personal use of the car can work out more beneficial.
However, to my mind, if a person is making an important business decision on the basis of how company cars are taxed, I would suggest they have their business priorities slightly askew.
Note also that IR35 can be applied to both limited companies and partnerships, so an LLP is not a guarantee against IR35 being an issue.
Finally, to set up a limited company, only one person is now required.
For a partnership, at least two individuals need to be "partners" in the enterprise. So, you would need to organise another individual who would be willing to be your business partner if setting up an LLP.
The Companies Act 2006 introduced the notion of the "one person company". Over the decades, the requirement to have more than one person when establishing a company has been gradually reduced. It finally reached the true "one man band" company with the 2006 Act.
It is to enable the legal and commercial benefits of limited liability status to be available to the individual. Note, this is NOT possible with an LLP.
It is to enable the legal and commercial benefits of limited liability status to be available to the individual. Note, this is NOT possible with an LLP.
Interesting Tribunal Case has just emerged showing why operating a partnership that provides limited company directors with a "company car" may not work any longer.
See below -
A recent tribunal confirming HMRC’s increasingly hard line on directors who benefit from company assets could put a brake on company cars provided by partnerships, warns Lesley Stalker.
The tendency for celebrities and highly paid executives to become self-employed “consultants” to avoid high taxes is becoming less fashionable for a number of reasons including IR35 controlling persons rules and controversies around the practice within public bodies including the BBC.
But it is still theoretically possible to work for a limited company and be provided with a car via a partnership to take advantage of less onerous tax treatments for private use of benefits in kind.
But a recent tax tribunal case highlighted the growing risks of this strategy. The appellants in DJ Cooper and partners v HMRC [2012] UKFTT 439 (TC) were faced with a retrospective tax bill of £200,000 after HMRC penalised them for what it regarded as a deliberate attempt to avoid paying taxes on company vehicles, which they believed were predominantly a private perk.
David Cooper was a director of a Leaside Builders Merchants, a limited company which had, along with other members, formed a partnership to conduct a business. The partnership’s function was broadly to provide services to its sole customer, the limited company. This is a perfectly valid tax planning strategy for top rate tax payers, providing there are sound commercial reasons for the structure. In the Coopers’ case, HMRC had already verified the partnership structure was valid.
The business partnership also provided cars for use by its partners both during business hours and privately. The relevant vehicle running costs were recharged to its client (the company) by the partnership and Cooper and his co-partners each paid tax on partnership profits after adjusting the figures to take into account private car usage.
This arrangement continued uncontested for some years until HMRC asserted that although the cars were used for delivering business services, they were being provided solely as a benefit by reason of employment with the limited company, so the benefits were subject to higher taxes under the employment rules, rather than the lower taxes which were due under the self-employed rules.
The case really hinged on the commerciality of the situation: HMRC argued that the cars were only provided by the partnership by reason of employment with the limited company.
The partnership was wholly dependent on the company, which did not require the partners to have cars, yet paid for them via the partnership. The structure would not have existed commercially and the vehicles represented 80% of the partnership’s assets, HMRC argued.
The tribunal judges agreed with HMRC, so the Coopers were assessed for an additional £200,000 in unpaid tax for a benefit in kind going back over several years.
In HMRC’s view, the cars provided by the Cooper partnership represented an attempt to avoid paying tax on a benefit that was predominantly personal rather than related to the business.
Since HMRC is on the lookout to boost its tax take, it is seeking to pushing back the boundaries between tax planning and tax avoidance. Any tax planning strategies you undertake should be very well thought through and need to be predominantly commercially driven to avoid situations such as this.
See below -
A recent tribunal confirming HMRC’s increasingly hard line on directors who benefit from company assets could put a brake on company cars provided by partnerships, warns Lesley Stalker.
The tendency for celebrities and highly paid executives to become self-employed “consultants” to avoid high taxes is becoming less fashionable for a number of reasons including IR35 controlling persons rules and controversies around the practice within public bodies including the BBC.
But it is still theoretically possible to work for a limited company and be provided with a car via a partnership to take advantage of less onerous tax treatments for private use of benefits in kind.
But a recent tax tribunal case highlighted the growing risks of this strategy. The appellants in DJ Cooper and partners v HMRC [2012] UKFTT 439 (TC) were faced with a retrospective tax bill of £200,000 after HMRC penalised them for what it regarded as a deliberate attempt to avoid paying taxes on company vehicles, which they believed were predominantly a private perk.
David Cooper was a director of a Leaside Builders Merchants, a limited company which had, along with other members, formed a partnership to conduct a business. The partnership’s function was broadly to provide services to its sole customer, the limited company. This is a perfectly valid tax planning strategy for top rate tax payers, providing there are sound commercial reasons for the structure. In the Coopers’ case, HMRC had already verified the partnership structure was valid.
The business partnership also provided cars for use by its partners both during business hours and privately. The relevant vehicle running costs were recharged to its client (the company) by the partnership and Cooper and his co-partners each paid tax on partnership profits after adjusting the figures to take into account private car usage.
This arrangement continued uncontested for some years until HMRC asserted that although the cars were used for delivering business services, they were being provided solely as a benefit by reason of employment with the limited company, so the benefits were subject to higher taxes under the employment rules, rather than the lower taxes which were due under the self-employed rules.
The case really hinged on the commerciality of the situation: HMRC argued that the cars were only provided by the partnership by reason of employment with the limited company.
The partnership was wholly dependent on the company, which did not require the partners to have cars, yet paid for them via the partnership. The structure would not have existed commercially and the vehicles represented 80% of the partnership’s assets, HMRC argued.
The tribunal judges agreed with HMRC, so the Coopers were assessed for an additional £200,000 in unpaid tax for a benefit in kind going back over several years.
In HMRC’s view, the cars provided by the Cooper partnership represented an attempt to avoid paying tax on a benefit that was predominantly personal rather than related to the business.
Since HMRC is on the lookout to boost its tax take, it is seeking to pushing back the boundaries between tax planning and tax avoidance. Any tax planning strategies you undertake should be very well thought through and need to be predominantly commercially driven to avoid situations such as this.
john2443 said:
Don't know if this is still the case but I beleive it was a requirement (Agencies act?) that the agency could only pay gross if you were a Ltd Co, but that may have been before LLPs existed. Check with the agency first?
This...Most contracts will be for a Ltd company, this is actually why most contractors work through Ltd's ( either directly or via an Umberella) The tax advantages were / are not necessarily the main driver that people think they are for using a Ltd
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