Partnerships and Income Tax Flashcards
(24 cards)
What is the legal definition of a partnership under the Partnership Act 1890 (PA 1890)?
A partnership is formed when two or more persons carry on a business with a view to profit (s 1 PA 1890). It does not have a separate legal personality from its partners.
What are some factors under s 2 of the Partnership Act 1890 that help determine the existence of a partnership?
Factors include decision-making involvement of individuals, ownership of property, and profit-sharing structure. No single factor is conclusive
What decisions in a partnership require unanimous consent under PA 1890?
Decisions involving changing the nature of the business, introducing a new partner, and altering the partnership agreement require unanimous consent (s 19 and 24 PA 1890)
How can a partner be expelled from a partnership?
Under s 25 PA 1890, expulsion is only possible if there is an express agreement allowing it, typically stated in the partnership agreement
What is “apparent authority” in a partnership context?
Apparent authority exists when a third party reasonably believes a partner has the authority to act on behalf of the firm, even if such authority does not exist between the partners
In what order are sale proceeds distributed under s 44 PA 1890?
1) Creditors are paid
2) Partners who lent money are repaid
3) Partners are paid their share of the capital
4) Any surplus is distributed as per the partnership agreement
What must a leaving partner do to escape liability for pre-existing debts under s 36 PA 1890?
The leaving partner must give actual notice to all individuals with whom the firm has previously dealt with. A notification of the partner’s departure must also be placed on the London Gazette to notify individuals who have not dealt with the firm yet
What is a novation agreement?
A novation agreement allows a retiring partner to be released from existing debts by entering into a contract with the creditor and the other partners, and possibly incoming partners. The newly constituted firm will take over liability
What is holding out?
When a particular person represents themselves as a partner to creditors. Representation can be oral, in writing, or by conduct. May be made by that person, or provided it is made with the person’s knowledge, by another person
What are LLPs, and how do they differ from traditional partnerships?
LLPs, established under the Limited Liability Partnerships Act 2000, provide limited liability to their members and operate as separate legal entities, unlike traditional partnerships
What is required to incorporate an LLP?
Filing form LL IN01 at Companies House along with the appropriate fee. The LLP must have at least two members, including two designated members responsible for administrative filings
What happens if a member leaves an LLP?
The LLP must notify Companies House using form LL TM01 or LL TM02 within 14 days. The LLP agreement typically governs procedures for membership changes
What is taxable income?
Taxable income includes recurrent money such as salaries or interest, specified by tax legislation
Who pays income tax?
Individuals, partners, personal representatives, and trustees, while companies pay corporation tax
What is the tax year for income tax purposes?
The tax year runs from 6 April to 5 April of the following year
What is the structure for calculating income tax?
1) Calculate total income from various sources.
2) Deduct allowable reliefs for net income.
3) Deduct personal allowances for taxable income.
4) Categorize income (non-savings, savings, dividend).
5) Calculate tax for each category.
What is the personal allowance for the 2024/25 tax year?
£12,570. It is reduced for those earning over £100,000 and eliminated at £125,140
What are the marriage and blind person’s allowances?
Marriage Allowance: Up to £1,260 can be transferred between spouses.
Blind Person’s Allowance: £3,070 allowance for registered blind taxpayers
What are the property and trading allowances?
Income below £1,000 from property or trading is tax-free, with a £1,000 deduction available for those with higher income instead of actual expenses
What are the income tax rates?
Basic rate (20%): income up to £37,700 after personal allowance
Higher rate (40%): income from £37,701 to £125,140
Additional rate (45%): income over £125,140
How is trading profit calculated?
Trading profit = chargeable receipts - deductible expenditure = capital allowance
What constitutes deductible expenditure?
Income-related expenses incurred wholly and exclusively for the trade, such as:
- Salaries
- Rent from premises
- Stock purchases
What constitutes capital allowances?
Writing down allowance: 18% on existing plant and machinery
Annual Investment Allowance (AIA): 100% deductible on new plant and machinery up to £1,000,000
