Why LLP accounts show no tax on profits

A trading LLP is transparent for tax. Section 863 of the Income Tax (Trading and Other Income) Act 2005 and section 1273 of the Corporation Tax Act 2009 treat its business as carried on by the members in partnership, so each member pays income tax or corporation tax on their own share and the LLP itself pays none. Because that tax is the members’ personal liability, the LLP SORP keeps it out of the profit and loss account, and any money the LLP holds back to pay it is shown as part of what the LLP owes its members.

Why is the LLP itself not taxed on its profits?

An LLP is a body corporate in general law, but tax law looks through it. Section 863(1) says that, for income tax purposes, if an LLP carries on a trade, profession or business with a view to profit, all its activities are treated as carried on in partnership by its members and not by the LLP as such, and its property is treated as held by the members as partnership property. Section 863(2)(c) adds that references to a company in the Income Tax Acts do not include such an LLP. Section 1273 of the Corporation Tax Act 2009 makes the same provision for corporation tax.

HMRC’s Partnership Manual at PM131450 sums up the effect: most LLPs are transparent for tax, and each member is charged to income tax or corporation tax on their share of the LLP’s income or gains as if they were members of a general partnership. Transparency also means an LLP cannot claim or surrender group relief. The LLP files a partnership return showing how profit is allocated, explained in our guide to the partnership tax return SA800, and each member reports their own share.

A member’s taxable share follows the profit sharing arrangements for the period, under section 850 of the 2005 Act, not the cash they withdraw. A member who draws little can still have a large tax bill. How the shares are worked out is covered in partnership profit sharing for tax.

What does the profit and loss account show instead?

The statutory formats for LLPs in Schedule 1 to the Large and Medium sized Limited Liability Partnerships (Accounts) Regulations 2008 include a line for tax on profit or loss and a line for other taxes, but the last line is “Profit or loss for the financial year before members’ remuneration and profit shares”. For a transparent LLP there is normally no tax on its own trading profit to enter, so that line is the pool of profit for the members.

What happens next depends on the members’ agreement. Amounts that members are entitled to automatically are shown as members’ remuneration charged as an expense, and any balance awaiting a discretionary decision is the result available for discretionary division. The detail is in accounting for LLP members’ remuneration.

The members’ own tax never appears. The LLP SORP has said since its first edition that where tax, current or deferred, to be paid on members’ remuneration is a personal liability of the members, it falls within members’ interests on the balance sheet and should not appear in the profit and loss account. There is therefore no current tax charge, no tax creditor and no deferred tax balance for the members’ personal tax.

How are tax retentions shown in the balance sheet?

Most LLP agreements let the LLP hold back part of each member’s profit so the money is there when the member’s Self Assessment payments fall due. The SORP treats the LLP in this role as the member’s agent: amounts retained for a member’s tax do not need separate disclosure, because the LLP is simply settling the member’s liability direct with HMRC. The retained money is still the member’s profit: once divided, it is part of loans and other debts due to members, not a separate tax creditor. How much to reserve is discussed in tax reserves in partnerships and LLPs.

The formats require loans and other debts due to members to be analysed into money advanced by members by way of loan, money owed to members in respect of profits, and any other amounts. Retained tax money belongs in the profits figure. When the LLP pays HMRC on a member’s behalf, the payment reduces what is owed to that member. For medium and large LLPs, paragraph 47 of Schedule 1 requires a reconciliation of loans and other debts due to members, which shows these payments within amounts withdrawn by members or applied on behalf of members. Where those balances are debt and where they are equity is explained in members’ interests in an LLP.

The SORP also says that tax withheld from members who later retire is dealt with as any other balance due to former members. It stays a liability to that person until it is paid over or released under the agreement.

Does an LLP ever show a tax charge?

Yes, in three situations.

• The LLP stops being transparent. Section 863(3) keeps transparency during a temporary cessation and during a winding up that is not connected with tax avoidance and not unreasonably prolonged. Section 863(4) ends it on the appointment of a liquidator or, if earlier, a winding up order. PM131450 confirms that an LLP that does not carry on a business with a view to profit, or is in liquidation, is regarded as a body corporate and is chargeable to corporation tax on its own profits. That tax is the LLP’s liability and is accounted for as such.
• Group accounts include companies. The SORP says that where an LLP’s group accounts include entities that are not partnerships or LLPs, such as companies, their tax is recorded in the profit and loss account under the relevant heading, with any liability carried as a creditor.
• Taxes that are not on profits. VAT, and PAYE and National Insurance on staff, are the LLP’s own obligations. PM131450 notes that members caught by the salaried members rules have PAYE operated on them and are charged Class 1 National Insurance; see the salaried members rules.

Corporate members are taxed too, but in their own accounts. Section 1273 brings their share of the LLP’s profit into their corporation tax computation, so the charge sits in the member company’s profit and loss account, not the LLP’s.

How does this work in practice?

Illustration only. A three member LLP makes a profit before members’ remuneration of £450,000. Its agreement divides all profit equally and automatically, and lets the LLP retain 35% of each share to meet the members’ tax. During the year the members drew £180,000 and the LLP paid £90,000 to HMRC on their behalf. There was no opening balance.

Item	£
Profit before members’ remuneration and profit shares	450,000
Tax on profit	Nil
Members’ remuneration charged as an expense	(450,000)
Result for the year available for discretionary division	Nil
Loans and other debts due to members at year end: 450,000 less 180,000 drawn less 90,000 paid to HMRC	180,000

Of the £180,000 owed, £67,500 (£157,500 retained less £90,000 already paid) is earmarked for tax, but it is still owed to the members and shown as such, not as a creditor to HMRC. Each member’s own tax return includes £150,000 of profit, whatever they drew.

What mistakes come up most often?

• Accruing members’ income tax in the profit and loss account or showing it under creditors as taxation.
• Presenting tax retentions as owed to HMRC instead of as amounts due to members.
• Treating the LLP’s payments to HMRC as an expense instead of as amounts applied on behalf of members.
• Assuming a member’s tax is based on drawings rather than on their allocated share.
• Forgetting that appointing a liquidator ends transparency, so the LLP’s own tax position must then be accounted for.
• Overlooking PAYE and National Insurance on salaried members, which are the LLP’s own obligations.

The SORP’s wider approach is summarised in the LLP SORP explained.

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Related Accountapedia entries

• Overdrawn member accounts in an LLP
• Limited liability partnerships (LLPs) explained
• LLP accounts: what must be filed
• Partnership, LLP or limited company
• National Insurance for partners and LLP members

Sources

• legislation.gov.uk: Act 2005 c. 5, section 863
• legislation.gov.uk: Act 2009 c. 4, section 1273
• GOV.UK: Manual page PM131450
• legislation.gov.uk: Act 2005 c. 5, section 850
• legislation.gov.uk: SI 2008/1913, schedule 1
• ACCA: The new LLP SORP 2024
• ICAEW: Tech 06 02 limited liability partnerships

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.