This article originally featured in Tax Journal on 1 March 2013 and can also be viewed at the Tax Journal website
A client, which currently operates its IFA advisory business as an LLP, is moving into the area of providing regulatory services to smaller firms of IFAs. Under FSA regulations this activity needs to be operated through a separate entity, a company being the preferred vehicle. The company will initially be financed by loans from the LLP. The LLP currently has four equal members and they propose to share equally in the profits of the company. The LLP wishes to access cash from the company for other business purposes, as and when required. What are the key tax issues surrounding this structure?
Although the client commercially sees the company as a simple extension of their existing LLP business, various tax issues arise. In the early years the new company is being financed by the LLP, and the position is straightforward. Complications start to arise if the company is helping to finance the LLP by way of loan. In that scenario, CTA 2010 s 455 becomes relevant and the new disguised remuneration rules need to be considered.
HMRC’s view is that s 455 applies to loans made by a company to an LLP where the members are participators in the company (Company Taxation Manual CTM61515). HMRC bases this view on CTA 2009 s 1273, which deems LLPs to be transparent for corporation tax purposes; therefore, any loan to an LLP is treated as a loan to the members. It is difficult to reconcile this view to HMRC’s stated position when the company is a member of the LLP, in which case it says s 455 does not apply.
This legislation can also apply when the company is owed trade debts by the LLP. Although under s#456(2) there is a let-out for trading and business debts, this let out does not apply if the credit period exceeds six months or is longer than that normally given to company’s customers. On a strict reading of the legislation, HMRC’s argument does not hold. CTA 2009 s 1273 states that ‘for corporation tax purposes’ anything done by or to an LLP is treated as being done by or to its members. HMRC take this to mean that a loan from a company can be treated as being made to its members and therefore the charge can apply to them if they are participators (or associates of participators) in the company. However as the s 455 charge is not corporation tax (it is not even a tax!) it is difficult to see how s 1273 can apply and we have to look at fact rather than this deeming provision. The fact is that a loan is made to an LLP which cannot be a ‘relevant person’ as it is a body corporate and not an individual and therefore s 455 should not apply.
It would be very unfair if a s 455 charge were levied in the case of a simple loan. The LLP regards the company as a subsidiary, and operates its business in the same way as any group of companies. The imposition of a s 455 charge would undoubtedly put cash-%ow constraints on the business, which is outside the spirit of the legislation. HMRC has already stated that it will not seek a charge where the company is a member of the LLP and it would seem reasonable for them to adopt the same approach where an LLP is a shareholder of the company.
Even if a simple loan to the LLP is not caught by s 455, the position gets more complex if these funds are then used by members to overdraw their capital accounts. This scenario appears to be within the ambit of CTA 2010 s 459 which treats a loan as if it has been made direct to the participator, where a loan is made to a person who makes a payment to a participator. A s 455 charge would also be supported by the recent case of DJ Cooper v HMRC  UKFTT 439 (TC) where it was held that a car provided by an LLP to its members could be taxed as a company car. This was on the basis that the cars were effectively provided by reason of the members’ employment in the company which financed the cars.
In general terms, disguised remuneration rules should be considered in circumstances where LLP members, who are employees of the company, overdraw their members’ accounts. “e disguised remuneration rules apply if:
We have experienced some purchaser due diligence where a company was a member of the LLP and the company had provided capital which members had drawn down. The wide scope of disguised remuneration rules meant that there was a risk of the overdrawn amounts being caught, as there is nothing to prevent an LLP from being a ‘relevant third person’. Various marketed LLP schemes may well be caught by these new rules.
However, the current case is different because the company is owned by the LLP. In HMRC’s notice of 7th July 2011 it states that ‘where the employer is a limited liability partnership (LLP), loans made by a company wholly owned by that LLP will be outside the scope of Part 7A’. This does not prevent the loans being regarded as a benefit in kind from the company.
In the clients’ case we would also argue that disguised remuneration rules do not apply because the arrangement would not be in connection with ‘A’s employment’. This argument would be strengthened if the members have no employment relationship with the company.
We conclude that s 455 is likely to apply in cases where funds are lent to the LLP by the company and then capital accounts are overdrawn by the members. We would seek to resist the application of s 455 simply in respect of loans for business use within the LLP. The disguised remuneration rules should not apply in this structure, but are a concern where a company is a member of an LLP. What is clear is that simple arrangements involving LLPs and companies can have fairly complex tax considerations!
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