Partnerships

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1 Introduction

A partnership is a single trading entity, but for taxation purposes each individual partner is effectively treated as trading in his own right and is assessed on his or her share of the tax adjusted trading profit of the partnership.

It is essential to understand therefore that it is not the partnership itself that is assessed upon its tax adjusted trading profit, but it is each individual partner who will be assessed on his or her share of that tax adjusted trading profit.

Partners are assessed on a tax year basis - the same as sole traders.

2 Trading income

1. The default method of calculating the trading profit of the partnership is the CASH BASIS although the partnership can elect for the ACCRUALS BASIS to apply.

2. The partnership’s tax adjusted profits or loss for an accounting period (after capital allowances for the partnership) is computed in the same way as for a sole trader.

3. Partners’ salaries and interest on capital debited on the statement of profit or loss are not deductible as expenses as these are simply an allocation of trading profit by the owners of the business. These must be added back in the adjusted profits computation.

3 Allocation of the trading profit or trading loss

1. The adjusted trading income or trading loss is divided between the partners according to their profit sharing arrangements in force during the accounting period.

2. Partners may firstly be entitled to salaries and interest on capital (known as 'prior appropriations of profit'). The balance of any trading profit (or loss) remaining will then be allocated in the profit sharing ratio (PSR).

4 A change in the profit sharing agreement

If the profit sharing agreement is changed during a period of account, the profit must be time apportioned before allocation under the different agreements.

5 Partnership capital allowances

1. Capital allowances are deducted as normal in calculating the tax adjusted trading profit.

2. If assets are used privately by the partners, then as for a sole trader only the business proportion is included in the capital allowances computation.

6 Partnership losses

1. Losses are allocated between partners in the same way as profits.

2. Loss relief claims available are the same as for sole traders and each partner may choose their own preferred use of their loss.

3. Partners continuing in a partnership will be able to claim to carry forward their loss, or to set off against total income of current and/or preceding tax years and thereafter extend against chargeable gains.

4. A partner joining the partnership may also choose to claim under opening years loss relief for losses in the first four tax years of his membership of the partnership.

5. A partner leaving a partnership may choose to claim under terminal loss relief.