The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:
The use of service companies alongside partnerships / LLPs has become increasingly popular in recent years. This is largely due to the difference between personal income tax rates and corporation tax rates.
Typically, a service company will be a limited company run alongside a partnership. The share capital may be owned by the partners personally or as a partnership asset. There may be some advantages to holding share capital within the partnership, for example, an advantageous CGT treatment if there is a change in partnership sharing ratios. See the Capital gains of a partnership guidance note.
The service company typically provides a number of services to the partnership. This may include:
In return, the service company will be paid a fee by the partnership equal to the costs incurred plus an appropriate profit margin uplift, although this may well be affected by the transfer pricing legislation ― see below.
Alternatively, the service company could be a partner in the partnership. In this case, the fee would be paid by way of a priority profit share.
Cash flow is improved through the accumulation of profits at a lower rate of corporation tax. These accumulated profits can then be used to fund working capital or for future re-investment. See Example 1 for the potential benefits in this respect.
The level of benefit will depend upon the profit margin uplift and relevant tax
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