Overseas Members in UK LLP & Non-UK Business – No UK Tax?

- UK registered Limited Liability Partnership (LLP)

- Non-UK resident (and non-UK domiciled) members/partners in the LLP

- Business of the LLP: outside the UK (non-UK sourced earnings)?

UK Income Tax:

Unlike the Company, merely because the LLP was registered in the UK, the members (partners) of the LLP are not liable to UK income tax on their share of the LLP profit as long as they are not resident in the UK and the LLP has no UK source income (all businesses/clients outside the UK).?

UK VAT:

Generally, a UK trade (including LLP) is liable to register for VAT when taxable earning/turnover exceeds the VAT registration threshold (￡85,000, not a lot) in any 12-month period (subject to exceptions). However, if the earnings are not derived from the UK source, they are not treated as taxable earnings, as in this case, so they do not count towards the threshold limit; means no mandatory VAT regime.

So why would someone do this?

(Setting up a UK LLP, not residing in the UK, working from elsewhere and having all clients outside the UK)

Who knows? But someone still does this. Probably for ‘UK Brand Value’ (‘UK’ Logo - UK Address, UK Registration Number, UK Entity etc.), yet avoiding the UK tax! This might be a solution for international (non-EU) companies and individuals to gain access to EU markets without having to go through the UK tax net.

Do they avoid tax altogether then?

NO WAY! The members of the LLP must be paying tax in the jurisdiction(s) where they are resident, for the purpose of tax. Local tax laws and practices kick in here.

Administration:

The ‘Designated Member’ of the LLP (equivalent to Company Director) will have an obligation to prepare and submit the UK Partnership Tax Return (SA800) annually for a tax year, by 31 January following the tax year, whether or not the individual members (partners) are taxed in the UK.?

The LLP Accounts (not necessarily audited except where subject to statutory or any other audit requirements) must also be submitted to Companies House, in a prescribed format, within 9 months from the end of LLP’s accounting period.?

The LLP (or the ordinary partnership) itself does not pay any income tax in the UK (though a Return is required). It’s the member/partner of the LLP/Partnership who will be solely responsible for income tax on their share of profits (where applicable).? ??

UK Limited Companies and LLPs:

They appear similar but with a number of different characteristics and tax treatments - LLP being seen as a ‘hybrid’ in nature. LLP is treated as an ordinary partnership for UK tax purposes (not a separate entity e.g., ‘transparent’) whereas for statutory reporting purposes it will be treated as if it is a Company (a separate legal entity ‘opaque’).

Having said this, LLP owns the assets of the business and is liable for its own debts; and the members (act as its agents) only have liability up to the amount (like capital in the ‘Company’ structure) they have contributed to the LLP (avoiding the ‘unlimited’ liability unless personal guarantees have been given).?

LLPs were introduced in the UK, for the first time, on 6 April 2001 (by the LLP Act 2000), not very long ago (if 23-year timeline is not too long for you!), as an alternative to the traditional partnership. Many professional firms like lawyers, accountants and other practitioners have increasingly been opting for the LLP structure given the benefits of its ‘hybrid’ nature.?

A word of warning: do not get confused with the US LLC or US LLP when it comes to US tax treatments.

Disclaimer: No responsibility, no advice, general comments, personal opinion only

?4 Oct 2023

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