Partnerships are taxed on a current year basis, which means that for 2016/17, a partnership with a year end of 5 April will be taxed on its profits for the accounting year to 5 April 2017, whereas a partnership with a year end of 30 June will be taxed on its profits for the accounting year to 30 June 2016. There are special rules for opening and closing years, and where accounting dates are changed.
Partners’ profit shares
The profits are divided between the partners in the profit-sharing ratio of the period of account. Although the taxable profits have to be agreed at the partnership level and no partner can agree an adjustment to the profits independently of the others, the partners are not jointly liable for tax on the profits. Rather, each partner is taxed individually on his or her share of the partnership profits, income and gains.
A partnership tax return (SA800) has to be completed and submitted to HMRC by 31 January following the tax year. Each partner is responsible for transferring the information from the partnership return onto his or her self-assessment return and for calculating and paying the tax due after taking into account their other sources of income, deductions and allowances.
It is advisable for someone within, or on behalf of, the partnership to be responsible for informing the individual partners of the entries and amounts required in their personal returns. Without this, even in the best regulated partnerships, no partner can be sure that his personal return reflects all the aspects and technicalities of the partnership situation as it relates to him or her.
New partners
The calculation of the amount on which each partner pays tax may be affected by ‘overlap relief’ arising when they are admitted to the partnership. Tax returns show details of the amount of overlap relief brought forward, used in the year and the amount of unused relief carried forward. Since the return does not show the amount of overlap profit created in the year, it is useful for easy reference to include a calculation in the white space on the self-assessment return.
Remember that overlap relief is calculated on profits after capital allowances, where applicable.
Example: New partner joining
Albert, Benji and Colin have been trading in partnership for many years, and share profits and losses equally.
Daniel joins the partnership on 1 January 2016 as an equal partner. The profits are as follows:
Accounting year-end £
Year to 30 September 2015 150,000
Year to 30 September 2016 200,000
Year to 30 September 2017 250,000
The profits will be allocated as follows:
Albert Benji Colin Daniel
Year to 30.9.15 150,000 50,000 50,000 50,000 N/A
Year to 30.9.16:
1.10.15–31.12.15
3/12 × 200,000 = 50,000 16,666 16,666 16,666 N/A
1.1.16–30.9.16
9/12 × 200,000 = 150,000 37,500 37,500 37,500 37,500
200,000 54,166 54,166 54,166 37,500
Year to 30.9.17 250,000 62,500 62,500 62,500 62,500
Partners will make individual self-assessments on their profit shares. The assessments for Albert, Benji and Colin for 2015/16, 2016/17 and 2017/18 will be on the amounts shown. The amounts that Daniel will self-assess will be as follows:
2015/16 1.1.16–5.4.16 3/9 × £12,500
£37,500
2016/17 1.1.16–31.12.16
to 30.9.16 £37,500
3/12 × £62,500 £15,625 £53,125
to 30.9.17 ________
2017/18 Yr to 30.9.17 £62,500
Daniel’s overlapping profits are three months out of the nine months to 30 September 2016 and three months out of the twelve months to 30 September 2017. He will be entitled to overlap relief on the double charged amounts of (£12,500 + £15,625) = £28,125. He will need to keep a record of these figures for future use.
Practical Tip:
There is no such thing as a partnership capital gain. The partnership is simply required to enter the proceeds from the disposal of the asset on the partnership return. This in turn is allocated between the partners in the appropriate ratio and each partner self-assesses the tax due on his or her chargeable gain. The partnership may need to provide the individual partners with further information about the asset, for example the acquisition details and incidental costs of sale, so that they can complete their capital gains tax computation.
