5. TC - Partnerships Flashcards
What is a partnership?
They are a group of sole traders acting together
How are partners taxed?
Each partner is taxed as an o indiv based on their share of taxable profits as follows:
- Adj prof of partnerships. If the profit figure from the P&L is stated after deduction of salaries or interest then these have to be added back to get total trading profits to be able to allocate
- Deduct capital allowances to get the taxable profits of the pship for the acc period
- Split the taxable profits between the partners
- Assess each partner on their share of profits using the normal basis rules
- Where losses have been generated, each partner utilises the best loss relief for their own tax position.
How are partners profits allocated?
Each partner is allocated their share of taxable profits as follows
- Allocate ‘salary’
- Allocate interest on capital
- Share the residual profit using the profit share ratio (PSR)
Why may profit allocation change in the year?
- Change in prof sharing agreement
- New partner may join the partnership
- A partner may leave the partnership
How is it dealt with if there is a change in partnership during the year?
Take the taxable profits of the partnership for the acc period and time apportion this according to each period under the diff profit sharing agreements
Any salaries and interest on capital must also be time apportioned for the different profit sharing agreements
How are profits calculated when a new partner joins the partnership?
The partner must use the opening year rules
How are profits calculated when a partner leaves the partnership?
They must use the closing year rules
What is a notional loss?
When a partnership makes a profit but the profit allocation gives one partner a loss
What must be done when there is a notional loss
The partner with a loss is deemed to have nil taxable trading income
The notional loss is then reallocated to the remaining partners in proportion to the profits initially allocated to them
What is a notional profit?
If a partnership makes a loss but the profit allocation gives one partner a profit
What happens when there is a notional profit?
The partner with the profit is deeemed to have a nil taxable trading income
The notional profit is then re-allocated to the remaining partners in proportion to the losses allocated to them
Describe an LLP
The liability of the partners is limited to the amount of capital introduced to the partnership
How does the taxation of an LLP differ to a normal parternship?
It doesn’t
They are taxed in the same way
Each partner is liable to income tax on his share of the taxable trading income of the LLP
WITH THE EXCEPTION of a salaried member of an LLP - he is treated as an epee fir the purpose of NI contributions, income tax and corp tax
In the exam, questions will specific if an indiv is a salaried member
What do you need to be careful about when asked about partnerships
- Has there been a change in partners in the year so need to time apportion?
- If its an LLP, is a partner a salaried member as this will impact how they are taxed
Are partners in LLPs entitled to loss relief in the normal way?
Yes, but some further restrictions do still apply
