No Loss Means No Tax Relief

The use of limited liability partnerships (LLPs) has become widespread since their introduction in April 2001. An LLP allows its members to have limited liability, which a ‘traditional’ partnership does not: in a traditional partnership, each partner is jointly and severally liable for the whole of the partnership debts.

An LLP gives all the participants in the enterprise a limitation of liability effectively the same as that enjoyed by a shareholder in a limited company. Like a limited company, an LLP is a ‘legal person’ and its members (as LLP partners are termed) do not own its assets beneficially.

The nature of an investment in a business can have significant tax effects also. For example, a partner in a loss-making partnership can normally claim his or her share of the partnership loss as a deduction from their other income for tax purposes...and it was such a claim that led to a recent case in the Upper Tribunal.

A company was a member of an LLP which made considerable trading losses. When it completed its tax return, it claimed its share of the LLP loss (more than £800,000) against its other income. The company had neither contributed anything to, nor made payments to, nor transferred any assets to the LLP and had not been called upon to make a payment in to meet the trading loss.

HM Revenue and Customs (HMRC) denied the claim on the ground that the member’s loss relief should be restricted to the sum it had placed at risk – the amount it had contributed to the LLP and/or the amount it was obliged to put into it in the event that the LLP became insolvent.

The way the finances of the members of the LLP were set up was convoluted and meant, in effect, that in the event of a trading loss, the tax relief claims of the members of the LLP could exceed the sums they had placed at risk.

The Upper Tribunal agreed that HMRC’s view was correct – relief could only be claimed on the sum effectively placed at risk in the LLP, which in this case was nil.

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