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Hybrid Partnerships & LLPs: HMRC + Anti Avoidance Provisions

Author

Rachel Wagstaff

Rachel joined ETC Tax in January 2018 having worked in tax for the past 6 years.

What is a Hybrid Partnership?

A hybrid or mixed partnership is a standard partnership but rather than just having individuals as partners, there is one or more corporate partners (or, in the case of LLPs, ‘members’).

Historically this was a popular structure as it allowed businesses to have the ‘best of both worlds.’

As partnerships are transparent for tax purposes, this means that all of the profits arising in the partnership are taxed on each individual partner in relation to their profit sharing allocation. This is regardless of whether the profits are actually extracted from the partnership.

The use of a company allowed the individual partner to only take the income they needed with the remaining profits being allocated to and accrued within the company.

This was advantageous as the individual would only be taxed on the income they received.

The profits allocated to the company would be subject to the lower corporation tax rates and could then be paid out to the individual at the lower dividend rate or, alternatively, accumulated within the company and used to fund the business.

Another advantage was that any capital gains that arose from the partnership could be allocated to the individual partner in order to utilise their annual exemption and the lower personal rates of capital gains tax.

Hybrid Partnerships & LLP Anti-Avoidance Provisions

Finance Act 2013 introduced anti-avoidance provisions which prevent income streams being funneled to the company in order to gain a tax advantage.

These anti avoidance provisions are relevant where the individual partner has the power to enjoy all or part of the corporate partner’s share (for example they are connected in that the individual is a partner in the partnership and is also one of the shareholders of the company).

These rules state that any income that is paid to the company must be arm’s length consideration for the service that the company has provided to the partnership.

If the service to the partnership is not an arm’s length transaction, the income that is invoiced by the company will be reallocated to the individual members on a just and reasonable basis. The income isn’t actually paid out to the individual if the income is ‘reallocated’ to them, but if the company does pay out this income to said individual no further tax will be charged on them.

Life after the anti-avoidance provisions

Although the anti-avoidance provisions restrict the ability of individuals to divert income in order to benefit from lower tax rates or utilising losses at the highest rates, there is still a place for hybrid partnerships.

Providing that the work carried out by the connected company for the partnership can be justified, in that the cost of the work provided is charged at the same rate as the what would be charged if the company was carrying out the work for a third party, the anti-avoidance provisions will not apply and there will be no reallocation of profits.

For more information on choosing the correct company structure of to help get the most of of your present hybrid company contact a member of our helpful tax advice team. You can also read more about corporate tax below.

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