Measures were introduced as part of the changes to the Taxation of Partnerships in the Finance Act 2014 to ease this cash flow disadvantage.
In effect, the tax due on these deferred profits is paid by the LLP not the partner. The advantage being that tax is paid at 45% without national insurance and an individual’s payments on account are not impacted. When the deferred amount is received the partner gets a credit for the tax already paid by the LLP.
In order to avail themselves of the mechanism, firms must elect to HMRC in writing, within 6 months of the end of the first period of account for which they wish to use the mechanism. For firms with a 31 March year end, an election must be made by 30 September 2015. Once made, the election will continue to apply until it is revoked, with HMRC confirming that the election does not need to be renewed annually.
Upon receipt of the election, a separate tax reference number will be issued to the LLP enabling them to complete an additional annual self-assessment tax return and pay the tax due on those profits elected into the mechanism by the relevant members of the partnership. Annual statements of the relevant restricted profits must be submitted by the LLP.
An LLP looking to operate this mechanism must apply before the deadline of 6 months post year end and ensure they are reporting accurately within the prescribed limits.