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EXPLANATORY
NOTE
NEW
CLAUSE 16
LIMITED
LIABILITY PARTNERSHIPS: GENERAL
SUMMARY
1.
The purpose of this New Clause is to ensure that limited liability
partnerships (LLPs) are in general treated as partnerships for tax
purposes. It clarifies and makes explicit this general rule which
was introduced by the Limited Liability Partnership Act 2000. The
exceptions from this general rule are LLPs in liquidation and LLPs
which are not carrying out a business with a view to profit. The clause
also includes measures to prevent chargeable gains held-over on business
gifts from falling out of charge when a LLP goes into liquidation.
DETAILS
OF THE CLAUSE
5.
Subsection (1) amends section 118ZA ICTA introduced
by the Limited Liability Partnership Act 2000 (LLP Act) to ensure
that LLPs are in general treated as partnerships for all tax purposes.
Without this rule, LLPs would be taxed as companies and carry that
tax status in relation to dealings with other parties. This is because
under the provisions of the LLP Act, with the exception of tax, LLPs
are regarded as “bodies corporate”, and so without special legislation
they would be treated as companies for tax purposes.
6.
Section 118ZA was included in the LLP Act and introduced this
general rule for the purposes of the “Tax Acts”. As the “Tax Acts”
cover only the provisions relating to income tax and corporation tax,
a separate provision (section 59A TCGA 1992) was introduced in the
LLP Act to cover the capital gains tax treatment of LLPs. This provision
has itself been amended by subsection (2) of this clause along the
same lines as section 118ZA.
7.
References below to the subsections of 118ZA refer to the new subsections
introduced by this clause.
8.
Section 118ZA(1) sets out the general rule that for
the purposes of the Tax Acts, a LLP which carries on a trade, profession
or other business “with a view to profit”, will be treated as a partnership
in respect of all of its activities, including any activities which
are not carried on with a view to profit. It follows that where a
LLP does not carry on a business “with a view to profit” then the
normal company tax rules will apply to it. Some societies and clubs
will fall into this latter category. It also makes clear that its
“third party” status for tax purposes is a partnership and not a company.
9.
Section 118ZA(2) confirms that where section 118ZA(1)
applies, any reference in the Tax Acts to partnerships will apply
to LLPs, whilst any reference in the Tax Acts to companies will not
apply to LLPs, unless the context otherwise requires.
10. Section 118ZA(3)
ensures that section 118ZA(1) will continue to apply to LLPs that
cease to carry on any trade, profession or other business “with a
view to profit”, where the cessation is only temporary. Section 118ZA
will also continue to apply during the winding up of a LLP, providing
the winding up is not connected with avoiding tax and the period of
winding up is not unreasonably prolonged. This rule will not however
apply where the LLP is placed in a formal liquidation, in which case
section 118ZA(4) will apply. Where section 118ZA(1) ceases to apply,
the normal company tax rules will apply.
11. Section 118ZA(4)
confirms that section 118ZA(1) will not apply where the LLP is in
liquidation. Where a liquidator is appointed or a court orders a
winding-up, the LLP will be taxed as a company.
12. Subsection (2)
of this clause amends section 59A TCGA 1992 that was introduced by
the LLP Act. Section 59A was introduced so that for capital gains
tax purposes LLPs are in general treated for tax purposes as partnerships.
The references to section 59A below are to the new subsections introduced
by this clause. Subsections (1) to (4) mirror those for section 118ZA.
13. Section 59A(1)
sets out the general rule to treat LLPs as partnerships for capital
gains tax purposes in relation to all its assets where the LLP is
carrying on a trade or business “with a view to profit”. It
follows that where a LLP does not carry on a trade or business “with
a view to profit”, such as some societies and clubs, the normal company
rules for chargeable gains will apply to it.
14. Section 59A(2)
confirms that where section 59A(1) applies, any reference in capital
gains provisions applying to partnerships will apply to LLPs, while
any reference in the capital gains provisions applying to companies
will not apply to LLPs.
15. Section 59A(3)
ensures that section 59A(1) will continue to apply to LLPs that cease
to carry on any trade, profession or other business “with a view to
profit”, where the cessation is only temporary. Section 59A will also
continue to apply during the winding up of a LLP, providing the winding
up is not connected with avoiding tax and the period of winding up
is not unreasonably prolonged. This rule will not however apply where
the LLP is placed in a formal liquidation, in which case section 59A(4)
will apply. Where section 59A(1) ceases to apply, the LLP will no
longer be treated as a partnership for chargeable gains purposes.
16.
Section 59A(4) confirms that section 59A(1) will not
apply to a LLP in liquidation. Where a liquidator is appointed or
a court orders a winding-up, the LLP will be taxed as a company.
17. Section 59A(5)
sets out how the chargeable gains of a LLP will be taxed when section
59A(1) ceases to apply (usually, when the LLP goes into liquidation.).
Section 59A(5) here is the same as old section 59A(2) that was introduced
by the LLP Act. It provides that the LLP (through its liquidator)
will be taxed on disposals of assets under the normal corporate insolvency
rules. Chargeable gains on assets disposed of in the liquidation
period will be taxed as if the section 59A(1) partnership tax treatment
had never applied and the only capital asset which the members will
then hold for tax purposes will be their interest in the LLP. The
proceeds of disposal of members’ interests will be based on the amount
of the liquidator’s capital distributions (if any) to the members,
after he has met the claims of the creditors of the LLP. And in calculating
the chargeable gain or allowable loss on that disposal, each member’s
interest will be taken as acquired on the date they originally joined
the LLP and by reference to their capital cost of becoming a member.
18. Section 59A(6)
confirms that when section 59A(1) either starts to apply to a LLP,
or ceases to apply, the members or the LLP itself are not treated
as having disposed of any LLP assets. This means that when a LLP
starts to be treated as a partnership for chargeable gains purposes,
or stops being treated as such, those changes of themselves will not
impose a tax charge on the members or the LLP.
19. Subsection 3
of this clause introduces a new section 169A into TCGA. Section 169A
ensures that where section 59A(1) ceases to apply, any gain that has
been held-over, under a gifts relief claim, on an asset held at that
time by a member of the LLP is charged on that member. This measure
is comparable to section 156A TCGA which was introduced by the LLP
Act to tax gains deferred under the business asset roll-over relief
provisions at sections 152 – 154 TCGA. Both measures are needed to
ensure that deferred gains do not fall out of charge on such an occasion.
20. Subsection 4
of the clause confirms that for capital gains purposes a LLP cannot
be the member of a group of companies, so that any group reliefs that
would be available if it had corporate status for tax purposes are
not available.
21. Subsection 5
of the clause brings subsection (3) into force on 3 May 2001, the
date when this Schedule was circulated and published.
22. Subsection 6
of the clause brings subsections (1), (2) and (4) into force on 6
April 2001, the date when LLPs were first able to register under the
LLP Act.
23.
The Limited Liability Partnership Act 2000 introduced an additional
choice of corporate vehicle through which to carry on business. Those
firms that choose to use LLPs will enjoy the organisational flexibility
and, in general, the tax status of a traditional partnership but,
unlike a partnership, its members will normally have limited liability.
It is thought that LLPs will be particularly attractive to professional
partnerships but the intention is that they will be available to all
businesses. The rules governing the incorporation and conduct of
LLPs are set out in the Limited Liability Partnership Act 2000 and
the regulations made under that Act. Details of the Act and the Regulations
may be obtained from the Department of Trade and Industry. Information
is available on the internet at http://www.dti.uk/cld/llpbill/index.htm
24. The LLP
Act introduced tax legislation to ensure that in general LLPs carrying
on a trade, profession or other business with a view to profit would
be treated for tax purposes as partnerships. This clause amends some
of that legislation to give more explicit rules to ensure that the
legislation fully meets its purpose in all respects.
25. The amendment of section
118ZA ICTA and section 59A TCGA by this clause does not reflect any
change in the underlying policy for the taxation of LLPs. It remains
the case, that in general LLPs carrying on a trade, profession or
other business with a view to profit will be treated as partnerships
for tax purposes. This will allow professional partnerships and other
partnerships to adopt the LLP structure for their partnership business
without incurring any tax penalty. The amended legislation makes
explicit what was implied by the legislation introduced by the LLP
Act, for instance it spells out what happens when LLPs go into liquidation.
26. The accompanying New
Clause 17 and New Schedule 2 include provisions to prevent tax loss
through investment and property investment LLPs.
27.
Guidance on the taxation of LLPs which carry on a trade or profession
was included in Issue 50 of Tax Bulletin published in December 2000.
This guidance is still current and may be referred to alongside the
amended versions of section 118ZA ICTA and section 59A TCGA to which
this Explanatory Note relates. Tax Bulletin is available on the Inland
Revenue Website at www.inlandrevenue.gov.uk/bulletins
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