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Incorporating an Limited Liability Partnership (LLP) in the UK can be an attractive option for entrepreneurs who wish to offer their services or products without paying tax at company level.

Explaining the legal form of the UK LLP

The UK LLP is a kind of partnership that is fiscally transparent but limits liability and is characterised by its tax advantages, especially for doing business while not being resident in the UK. Some time ago, we wrote an article in which we talked about the different types of partnerships (LLC, LP, LLP in the UK, USA, Ireland, Cyprus, Canada, etc.) and their many advantages.

The main features of the UK LLP are as follows:

  • The United Kingdom is made up of four nations: England, Scotland, Wales, and Northern Ireland. England and Wales have a common structure for company registration, while Scotland and Northern Ireland have their own systems.
  • The LLP in the UK requires at least two limited liability partners. The partners can be individuals or companies, with no residency requirements. However, as the partner must apply for a UK tax identification number for registration, the old practice of using offshore partnerships has become virtually unworkable. In general, we recommend using a natural person.
  • The LLP can operate in the UK without tax restrictions, but if you have activity within the UK, this could trigger tax liabilities for the partners. Therefore, if you do not want to pay tax, you should not use the UK LLP to carry on business on UK soil.
  • The sale of services and products to customers in the UK from outside the UK (value creation outside the UK) by a UK LLP does not usually give rise to a UK tax liability, but may give rise to VAT liabilities —depending on the nature of the products and services sold, as explained in this article on VAT on digital products.

LLP taxation and how to benefit from it in practice

In the UK, the LLP is considered to be a transparent entity for tax purposes, which means that it is not subject to taxation: instead, it is the partners who are taxed in their own country of residence on their share of the profits, either as individuals or as companies. Tax residence and residence for compliance are therefore of great importance. Ultimately, the same tax rules apply as with the US LLC.

UK resident partners are taxed on their overall share of the LLP’s profits. This means that if an individual (Thomas) owns 25% of an ice cream distribution LLP in London and is resident in the UK, they must declare this share of the profits in their tax return, irrespective of whether or not he has received such profits to their private account.

On the other hand, non-resident partners —such as Perpetual Travellers— would only be taxed on the profits they make from activity carried on in the UK. So, if we had a partner called Martin, who is not resident in the UK and has an LLP that offers transport services, but they do not offer their services in the UK, no UK tax liability would arise. Even if the LLP is registered in the UK, neither the LLP nor Martin nor anyone else will incur any UK tax liability.

If none of the partners are resident in the UK and the LLP does not have a permanent establishment in the UK, you will not have to pay UK tax or face significant local red tape. In such cases, you will need to file a Nil Return for the Partnership and an HS380 return to Company House. You will also need to file annual financial reports and a confirmation notice. You do not need to have an audit if you fall within a certain turnover threshold —which is explained later in the article.

In addition, each partner must register with HM Revenue & Customs (HMRC) on forms SA401 or SA402, which can be quite a complex process for foreign companies wishing to become partners in a UK LLP.

Our offer to Denationalize.me clients includes the handling and completion of all these processes so that the LLP does not have to pay tax (as long as there is no UK source income, remember) and, of course, does not face any penalties. Individuals as partners may have to make a self-assessment return to HMRC, but we can help you with this too by providing you with sample forms and assisting you in completing them.

Detailing whether the income is classified as foreign or UK with an LLP

UK Limited Liability Partnerships (LLPs) are required to submit a partnership return declaring the income and expenditure of the partnership. In addition, individual partners must file a self-assessment at a personal level to declare their share of the LLP’s profits and any other personal income.

In the partnership return, all income generated by the LLP is itemised, with a breakdown of how much of this income is domestic and how much is foreign. Each partner then uses this information to complete its self-assessment, declaring its share of domestic and foreign income.

This process enables HM Revenue & Customs (HMRC) to determine tax liabilities at both LLP and individual partner level.

The classification of income as domestic or foreign in a UK LLP’s partnership return may depend on several factors, including the LLP’s tax residence and the nature of the work performed. In general, for UK tax purposes the following criteria apply:

UK income:

  • Income generated from activities carried out in the UK is considered.
  • Sales to UK customers are considered domestic income if the services are provided from the UK.
  • If the physical work or value creation is performed within the UK, the income earned from those services is considered domestic.

Foreign income:

  • Income generated from activities outside the UK.
  • If the work is done from Costa Rica, even if the clients are British, the income may be considered foreign because the value is created outside the UK.

Let’s imagine the case of John, who has an LLP in the UK, but performs the work from outside the UK —for example, from Costa Rica— and sells to UK clients. Such income would generally be considered foreign income, as the work (value creation) is done outside the UK.

If we ask ourselves what is considered to be incomes or gains arising in the UK (which are those that would be taxed in the UK), we should note that UK-sourced income or gains refers to any income or capital gains that are generated from sources within the UK. Here is a breakdown of what is typically included as UK source income:

  • Earnings from work: Wages, salaries and benefits received for work done in the UK.
  • Business Income: Profits from businesses or companies operating within the UK.
  • Rental Income: Money earned from renting properties located in the UK.
  • Interest and Dividends: Interest from UK bank accounts or UK government securities, and dividends from UK companies.
  • Capital Gains: Profits from the sale of UK assets such as property, shares or businesses.
  • Other Income: This may include pensions from UK sources, royalties for intellectual property used in the UK, and certain other types of income specified by HMRC.

As always, bear in mind that tax regulations can be complex and very situation-specific.

Incorporation and administration of the LLP

Incorporation of an LLP in the UK requires at least two partners, and offers a flexible structure in this regard.

The company registration process cannot be completed online (but can be completed remotely), and requires the use of a registration service, approved commercial software or the submission of the registration form by post.

The processing time at the Commercial Registry is usually a maximum of 48 hours.

In terms of compliance requirements, HMRC requires all LLPs to file an annual partnership return (SA800) by the end of October (or January, if filed electronically) for the tax year ending April —even if there has been no business activity. Both the LLP and the partners face penalties for non-compliance.

In addition, each partner must apply for a Unique Tax Reference (UTR) in the UK and file a self-assessment return (AS100 + applicable schedules) annually by the end of October (or January if filed electronically) for the tax year ending April.

Companies House requires all limited liability partnerships to file annual report within nine months of the anniversary of registration and an annual confirmation statement on payment of a renewal fee. Failure to do so may result in the dissolution of the LLP.

The UK LLP must have a registered office in England or Wales which can receive official communications. To benefit from the tax advantages of this structure, the registered office must not be in Scotland, Northern Ireland, or overseas.

At Denationalize.me we take care of all these issues: all you have to do is hire our LLP registration and maintenance service in the UK or, if you are not sure which is the best option for you, book a consultation so that we can analyse your case and explain to you which is the best structure for your business.

We offer you two different packages:

  • Only the LLP (Limited Liability Partnership), would cost USD 1,200 and, after 12 months, you would have to pay an annual fee of USD 800. This option is perfect if you already have two partners (usually 2 natural persons or 1 natural person and 1 legal person).
  • If you want the LLP + LTD (Private Limited Company) as a partner for, it would cost USD 1,600. The annual fee after the first year would be of USD 1,200. This is the necessary option if you are on your own and therefore need a partner to form the partnership.

Our LLP incorporation service also includes standard reports for non-regulated sectors.

It is important to note that a self-assessment form is not included, but we will provide you with sample forms and help you to complete them, and we can also provide you with contacts who will do the self-assessment for you. As you will generally have no UK-sourced income, you will not pay any tax and therefore have nothing to deduct, so we do not generally see the need to engage a UK tax advisor, often expensive and of little use (other than to take the burden off your shoulders).

An account audit is not required as long as the LLP meets the following criteria:

  • annual turnover not exceeding GBP 10,2 million;
  • total assets not exceeding GBP 5.1 million; and
  • average number of employees not exceeding 50.

This makes the LLP particularly attractive for small and medium-sized enterprises with a low bureaucratic burden.

Opening bank accounts for your UK LLP

The UK is home to a multitude of large banks, but for LLPs with non-resident partners, opening a business account with them can be a challenge.

Fintech services such as Wise, Revolut, Juni, Payoneer, Payeer, Paysera, and Skrill offer a good alternative in this case, as they have a wide range of services and are compatible with payment systems such as Stripe and PayPal. In the specific case of PayPal, the UK LLP is an extremely interesting alternative to the US, where PayPal Business accounts are often very complicated to open (and keep open). In the UK, these are often easier to open and do not get blocked as quickly. In addition, there are dozens of Fintech banks in the UK, such as the good old online bank Fire.com.

Traditional UK banks often require a personal visit and ask for proof of local business connections. However, opening an account with large banks such as HSBC, Barcylays, or Lloyds is much easier. Using a normal limited company as a second partner with between 1% and 10% in the LLP helps, but of course comes with minimal taxation (10% of the 20% corporation tax would only be 2% on total turnover, for example).

A big advantage of UK LLPs over US LLCs is that it is much easier to open a bank account with traditional banks. So, if you live in Spain, Italy or wherever, you will have a much easier time opening a company account for your UK LLP than for a US LLC. On the one hand, British companies are not subject to FATCA —which makes life very difficult for banks— and, on the other hand, the British public registry makes KYC processes much easier for banks.

As for the exchange of banking information, the UK is part of the Common Reporting Standard (CRS), so it participates in the automatic exchange of financial information between countries. In other words, if you have bank accounts in the UK, do not expect anonymity on that regard.

Comparison of the UK LLP with other types of partnerships

Not sure where to set up your business? It is certainly a difficult decision.

Each country offers its own advantages and, depending on your goals and needs, one option may be much more suitable and advisable than others.

You have the American LLC, the Cypriot LP, the LLC in the Emirates, the Limited in Hong Kong, the Panamanian Limited Company, the Estonian OÃœ, the companies in Georgia, Bulgaria, Romania, Hungary, Malta, Poland…

It is not easy to decide which of these options is best for each type of business, so we have created our Company Encyclopaedia, and we can help you analyse where to register your business in a consultation. Either way, here is a table that might help you decide.

Features LLP (United Kingdom) LLC USA OÜ (Estonia) LP (Cyprus)
Incorporation Period One week period (company registration, UTR application, etc.) 10 days, plus an additional week to obtain the EIN Only one day after receipt of the e-Residency. However, the application period for e-Residency is usually 6-8 weeks and involves travelling to an Estonian consulate. 1 to 2 weeks
Bureaucracy Minimum incorporation and annual confirmation statement requirements Minimum incorporation and annual report requirements (except in New Mexico) e-Residency is required, and it is possible to complete procedures digitally. Required annual accounting and audits, stricter KYC processes at incorporation
Start-up Costs EUR 1,200 EUR 1,800 EUR 285 (plus the costs of obtaining e-Residency, permanent establishment, accounting… often exceeds EUR 2,000). EUR 5,000 (including accounting and auditing)
Annual Costs EUR 800 EUR 1,400 Between EUR 1,000 and EUR 1,500 (depending on the service package) EUR 5,000 (including administration and VAT returns)
Banking Secrecy Participates in the CRS Does not participate in the CRS (for commercial accounts) Participates in the CRS Participates in the CRS
Banking Options A wealth of banking and Fintech options internationally Good access to banks and credit markets within the US. Access to the EU banking network and Fintech services Good access to EU banking network and Fintech services
Taxation No taxation on foreign income (sourced outside the UK) Potentially tax-exempt for non-US resident owners, exempt from US income tax if there is no permanent establishment or employees in the US. 20% (soon to be 22%) corporate tax on distributed profits, no tax on undistributed profits, potentially tax-free salary Fiscal transparency, no taxation as long as the partners are resident abroad in a tax-exempt country
Anonymity Partners are listed on the UK public transparency register and are easily accessible. Increased anonymity: partners are not listed in the register. In addition, the US transparency register is not public. Partners are listed in the EU’s public transparency register and are easily accessible. The partners are listed in the EU’s public transparency register.
Data Protection in the EU Compliance with EU GDPR Non-EU Member State Full compliance with EU GDPR Full compliance with EU GDPR
EU VAT Number Available, and required for certain international transactions It is complicated to obtain, but possible for international companies. Included, necessary for business within the EU Included, necessary for business within the EU
Double Taxation Treaties Yes, but not available for non-resident partnerships Yes, but not available for non-resident partnerships Yes, comprehensive agreements within the EU and accessible with minimum substratum Yes, but not available for non-resident partnerships

 

Conclusion on UK LLPs

In summary, these are some of the excellent advantages of the UK LLP:

  • Tax-free partnership: if you are not resident in the UK and the work is not done there, the LLP’s transparent tax structure does not trigger tax liabilities.
  • Access to premium financial services: you will be able to open bank accounts in the UK (by going in person) and use the main Fintech platforms (online registration), as well as the most common payment gateways (Stripe and PayPal).
  • Prestigious address for your virtual registered office: receive your mail at a privileged London address and enjoy the UK’s reputation as a good location for your business.
  • Asset protection and limited liability: benefit from the limited liability offered by this construction in case of business mishaps.
  • Fast and efficient incorporation: in less than a week, your LLP will be up and running.
  • UK double taxation treaties: UK treaties with the countries you may be interested in do not apply to LLPs, as they are fiscally transparent, but do apply to UK LTDs you use as partners in the LLP.
  • Cheap and accessible option for most people: The UK LLP is one of the cheapest options you have if you want to set up your own company. In addition, you will be able to do all the paperwork remotely from your computer.

Of course, the UK LLP also has disadvantages: If you are looking for a company that provides you with some anonymity, the UK is not a good option, you should look more towards the US or Nevis. If you are resident in a high tax country where you are taxed on foreign income, given the tax transparency, you would have to pay a lot of tax with the LLP and would be better off with a company in Malta, Cyprus, Panama or Romania. If you are a single partner and do not want to set up an additional company as a second partner, you would do better with a US LLC.

There are many other companies in the world that you can set up, but the ones we discuss in our articles are the most common and interesting for Perpetual Travellers. In any case, do not forget what your specific needs are and do not let yourself be guided by trends and what others are doing. Remember, the best option is the one that best fits your goals and lifestyle. We invite you to discover what that ideal option is in a consultation with us.

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