UK tax deductibility of partner expenses
UK fund managers and advisors that are structured as LLPs are typically treated as tax transparent partnerships for UK income tax purposes. As a result, the LLP members are subject to UK income tax on their annual share of LLP profits at rates of up to 47% regardless of the cash distributions that they receive.
The recent case of Vaines v HM Revenue and Customs  EWCA Civ 45 (25 January 2018) considered how an expense met personally by a member of an LLP can be claimed against the member’s annual share of trading profits from the LLP. The judgement confirmed that the expense needed to be incurred wholly and exclusively for the purposes of the LLP’s trade and, crucially, needs to be included in the LLP return and cannot be claimed directly on the member’s personal tax return.
We recommend that fund advisors and managers review their trading LLP arrangements with regard to expenses met by partners’ personally (including those of any corporate members) and ensure that they are either accounted for in the LLP accounts or included within the LLP’s tax filing.
It is important to note that investment partnerships (such as private equity funds themselves which are not trading) and corporate members receiving a service fee from a partnership (rather than a partnership profit share) should not, in general, be affected by this decision in the Vaines case as the facts should be materially different.
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