Partnerships

Question 1

Definition of the partnership

Answer 1

• is a body of persons carrying on business together with a view to profit

Question 2

What is the basis of assessment of partnership?

Answer 2

• each partner is taxed individually, despite the partnership being a single trading entity, with its own accounts
• each partner is taxed based on their allocated share of the partnership profits as if the partner were a sole trader making that amount of profit

Question 3

How to determine a partner’s taxable profits?

Answer 3

• firstly, the trading profits per partnership accounts are adjusted for tax purposes as for a sole trader, deducting the capital allowances of the partnership
• secondly, the tax adjusted trading profits of the partnership are allocated to the individual partners
• finally, the basis of assessment rules are applied to determine each partner’s taxable profits in a tax year

Question 4

The computation of partnership profits and losses

Answer 4

• partners’ salaries and interest on capital are not deductible expenses in the adjustment of profits computation, since these are merely an allocation of profit

Question 5

The allocation of the profit of loss (partnership)

Answer 5

• the tax adjusted trading profit or loss is allocated (divided) between the partners according to their profit sharing arrangements for that period of account
• partners may be entitled by the partnership agreement to ‘salaries’ (a fixed allocation of profit) and ‘interest on capital.’
• the balance of profits remaining after the allocation of any salaries or interest is allocated in the profit sharing ratio (PSR)
• whether it is described as salary, interest on capital, or profit share, the total allocated to a partner is assessable to income tax as trading profit

Question 6

Partnership capital allowances

Answer 6

• are deducted as an expense in calculating the tax adjusted trading profit or loss of the partnership. The profit allocated between the partners is therefore after deducting capital allowances
• individual partners cannot claim capital allowances on their own behalf

Question 7

If assets are owned privately regarding capital allowances

Answer 7

• the total cost of such assets are included in the partnership’s capital allowances computation
• the maximum capital allowances available is calculated in the normal way
• the amount actually claimed is the business use proportion
• the capital allowances claimed are deducted as an expense prior to allocating the profit to each partner

Question 8

When profit sharing ratio may change?

Answer 8

• the existing partners may decide to allocate profits in a different way. This may be as a result of a change in duties, seniority or simply by agreement of the parties concerned
• the membership of a partnership may change as a result of the admission, death or retirement of a partner
• provided that there is at least one partner common to the business before and after the change, the partnership will automatically continue for tax purposes
• where there is a change in membership, the commencement or cessation basis of assessment rules apply to the individual partner who is joining or leaving the partnership only

Question 9

What are the steps taken in commencement - new partner

Answer 9

• identify the start date of the new partner
• allocate the profits between the old and new partner: - if the new start date is part way through the period of account, the allocation of profits is split between the two periods concerned
  - if the new partner joins at the start of new period of account, profits in the period are allocated throughout using the new PSR
• determine the assessable trading profits for the tax year

Question 10

Determine the assessable trading profits for the tax year for new partner?

Answer 10

• for those partners common to the old and new partnership, there is no change in the method of calculating their assessable trading income and the normal CYB approach applies
• the partner joining must apply the opening year rules, as for the sole trader. A partner is treated as commencing when he, she or they joins the partnership
• each partner will have their own overlap profits, available for overlap relief

Question 11

Steps taken when partner leaving - cessation

Answer 11

• identify the partner ceasing to be a member
• allocate the profits, remembering that if this is part way through the period of account it will affect the profit sharing ratio for that period of account and this will need to be calculated in two parts
• for the partners continuing, use the normal CYB basis of assessment to determine the profits assessable for the tax year
• for the partner ceasing, use the closing year rules and deduct any overlap profits that partner has available

Question 12

What is limited liability partnership?

Answer 12

• is a special type of partnership where the amount that each partner contributes towards the partnership losses, debts and liabilities is limited by agreement

Question 13

What are the taxation implications of an LLP?

Answer 13

• it is generally taxed in the same way as all other partnerships
• at tax, normal loss reliefs are available