BIM72125 - Partnerships: Limited Liability Partnership (LLP): computation of profits

Professions

FA98/S42 and ITTOIA05/S25 require the profits of a trade, profession or vocation to be calculated in accordance with generally accepted accounting practice (GAAP), subject only to the adjustments required or authorised by law, see BIM31000 onwards.Those rules apply equally to the computation of the Case II Schedule D profit of a LLP that carries on a professional business for the purpose of calculating the IT liability of the members of the LLP.

Capital allowances

Where a LLP succeeds to a business previously carried on by a sole trader, professional, general or limited partnership this will not of itself give rise to a balancing event for the purposes of the capital allowances provisions.

Cash basis – catching up charge

If on conversion the LLP succeeds to the business previously carried on by an old partnership then the spreading rules for the catching up charge (see BIM74025) continue to apply as if the conversion had not occurred.

Cessation/commencement

Where a LLP succeeds to a business previously carried on by an old partnership this will not of itself involve the cessation of the old partnership’s trade or profession or the commencement of a new trade or profession by the LLP.

Partnership annuities

Where an obligation to pay an annuity is transferred from the old partnership to the LLP, then the members of the LLP will be entitled to higher rate income tax relief for their share of the ongoing payments; and incoming LLP members who assume part of that obligation will also be entitled to such relief for their share.

If an obligation to pay an annuity is not transferred to the LLP and the members of the old partnership continue to pay it they will be entitled to higher rate IT relief for their share of those payments until such time as they cease to be a member of the LLP or until the business originally carried on by the old partnership ceases, whichever is the earlier.

Demergers

Where a LLP only takes over part of the old partnership’s trade, such an event constitutes a ‘demerger’ to which SP9/86 applies. Unless on the demerger the part of the business carried on by the LLP is recognisably ‘the business’ previously carried on by the old partnership then the cessation provisions will apply. In that event each member of the old partnership will be entitled to their personal overlap relief. Equally you should apply the commencement provisions to all the members of the LLP.

But if the LLP does carry on ‘the business’ previously carried on by the old partnership then, as it will have succeeded to the old partnership’s business, the cessation provisions will not be applied to the old partnership and any overlap relief will be carried forward. Equally you should not apply the commencement provisions to the members of the LLP. But the old partnership is regarded as having commenced a new business in relation to the part of the trade it retains.

Whether or not the business carried on by the LLP is recognisably ‘the business’ previously carried on by the old partnership is a question of fact.