Partnerships: What to Look Out For

Without a formal partnership agreement, the default rules of the Partnership Act 1890 apply. This legislation is rarely suited to modern businesses.

One key risk is that, in a traditional partnership, the death of a partner can automatically dissolve the business. This can be highly disruptive and unexpected.

Clear agreements also help avoid disputes around profit sharing and partner drawings.

We work closely with trusted legal advisers to ensure appropriate agreements are in place. Alongside this, our tax team can help forecast profit allocations and ensure partners set aside sufficient funds for tax liabilities.

Recent tax changes mean partners are taxed on profits arising in the tax year. If your accounts don’t align with the tax year (31 March or 5 April), this can create challenges.

Often, this leads to:

• Estimated figures being submitted on tax return
• Later amendments once final accounts are available

Inaccurate estimates can result in interest charges or unnecessary strain on cash flow.

We can provide forecasting and outsourcing support to improve the accuracy of estimates, helping you manage cash flow and avoid unexpected adjustments.

Where an LLP includes both individual and corporate members, anti-avoidance rules may apply.

If an individual can benefit from profits allocated to a corporate member, HMRC may look to reallocate those profits back to the individual, potentially increasing the tax burden significantly.

This area is often misunderstood and can lead to:

• Unexpected tax liabilities
• Interest and penalties
• Differences in tax rates of up to 22%

We can review partnership structures to identify risks and recommend commercially appropriate solutions, particularly when structures change or have not been reviewed recently.

Some LLP members may be treated as employees for tax purposes if they:

• Have limited influence
• 80% of the remuneration is a fixed amount
• Have minimal capital at risk

This can trigger PAYE and employer National Insurance, increasing costs for the business.

 If this is the case, we will assess whether the relevant conditions are met and advise on structuring arrangements more efficiently where appropriate.

Losses can present both opportunities and risks. The availability of relief depends on several factors, including the commerciality of the business and the structure of the partnership.

Key considerations include:

• How losses can be used (carry forward, sideways relief, etc.)
• Restrictions linked to capital contributions
• Allocation of losses between members

 We can help you ensure losses are used as efficiently as possible, aligned with your commercial objectives.

If your partnership operates internationally or includes overseas members, the complexity increases.

You may need to consider:

• Reporting obligations in multiple jurisdictions
• Withholding taxes and double taxation
• Availability of foreign tax credits

Our international tax specialists can assess your position, ensure compliance, and help mitigate double taxation risks.

While partnerships are effective in many cases, there are situations where an alternative structure such as an LLP or limited company may be more appropriate.

This is particularly relevant during periods of growth, increased investment (e.g. Research & development), or where liability protection becomes a concern.

However, incorporation can be significant step with tax implications across multiple areas.

We can review your current structure, advise on alternatives, and guide you through any transition while maximising available reliefs.

Planning for succession or exit is often overlooked but can have major tax and cash flow implications.

Key scenarios include:

• Exit on death – Inheritance tax (IHT) and Business Property Relief considerations
• Exit on sale – how proceeds are taxed and reliefs available
• Retirement – treatment of capital accounts and ongoing income

We support clients with forward planning, helping to identify tax-efficient strategies and avoid unexpected liabilities.