Chapter 15 - Introduction to Partnerships

Question 1

Definition

Answer 1

Two or more people working together in a business with a view to making a profit. The profit is shared between the partners

Question 2

Partnership Agreement

Answer 2

Partnerships should have an agreement, but not all will. The agreement will set out the terms of the partnership, and will include the profit sharing ratio. It will also cover rules on admitting a new partner, the retirement of a partner, the conduct of partners, the ownership of assets and the resolution of disputes

Question 3

Tax Treatment

Answer 3

Adjust the accounting profit to get taxable income, then allocate the adjusted profits to the partners according to the PSR. Profit share will be shown on a partnership tax return. Each partner must also include their partnership income in a self assessment. The partnership doesn’t have a tax liability, the partners do

Question 4

Partnership Self-Assessment

Answer 4

Partnership must register with HMRC immediately. A nominated partner completes the return containing profit/loss, other income and the profit split. Due same date at regular self assessment date.

Question 5

Partnership SA Penalties

Answer 5

The same penalties apply as regular SA and each partner gets a penalty, it isn’t shared. £100 late filing penalty, £10 a day for 3 months/90 days, £300 (or 5% of liab) for 6 and 12 months late

Question 6

Partnership SA Amendments and Records

Answer 6

Same as regular SA for amendments and enquiries. Partnerships must keep records for t least 5 years and 10 months following the end of the relating tax year

Question 7

Partner Salary

Answer 7

Not actually a salary and not treated as employment income. It’s an advanced allocation of profit before the actual profit share

Question 8

Interest on Capital

Answer 8

Chunk of advanced profit based on the balances the partners hold on their capital accounts. It is treated as a share of trading income

Question 9

Relief for Qualifying Loan Interest

Answer 9

A bank loan taken out to buy into a partnership is classed as a qualifying loan. This means the interest paid on the loan is deductible which reduces a person’s net income. It’s capped at the greater of £50k and 25% of adjusted total income