07 Jan Allocation of partnership profits
Partnership profit allocation refers to the equal distribution of profits. Partnership income is computed for the whole partnership by reference to the various sources of income for each accounting period. However, the legislation also says that for each tax year in which a firm carries on a trade. Each partner’s share of the firm’s trading profits of a partnership or loss is considered for the Income Tax (Trading and Other Income). Act 2005 (ITTOIA ), as profits or losses of trade, carried on by the partner alone. This is also referred to as the “notional trade” (ITTOIA 2005, s 852).
The “notional trade” is when the firm starts to carry on the actual trade or if later. The date when the partner becomes a partner in the firm. It is treated as ceasing when the firm ceases to trade or, if earlier. The time the partner ceases to be a partner in the firm. If the partner carries on the partnership business as a sole trader. If the partnership commenced before others join him in a partnership or after all other partners retire from the partnership. The partner is treated as starting to trade on the date the earlier sole trade starts and ceases when the later sole trade ceases, as the case may be. Profits are allocated to the partners in accordance with the profit-sharing arrangements agreed between them and in force during the relevant period.
These cannot be varied retrospectively. It follows that an established partner in a partnership will pay tax by reference to the share of profits earned in the partnership’s accounting year ending in the relevant tax year. For example, an established partner in a partnership with a year-end of 31 August will be taxed in 2018/19 on the share of tax-adjusted trading profits and other untaxed profits for the year ending on 31 August 2018. Special partnership profit allocation rules apply to commencement and cessation of the partner’s notional trade and any change of accounting date of the notional trade (which will occur if there is a change in the accounting date of the ‘actual trade’ carried on by the partnership). The partnership is required to make a return of its taxable income under each income heading to HMRC. The division of the profits between the partners will be shown in a partnership statement:
Claim for Partnership Profits
Claims and elections, which affect the computation of the partnership profits, must be made in the partnership return. This includes requests for pre-trading expenses and capital allowances, where appropriate. It, therefore, follows that individual partners cannot make supplementary capital allowances claims; instead, they must all be included in the partnership claim.
Claims and elections which only affect the tax liability of an individual partner must be made by that partner in his or her personal tax return. This includes claims for loss relief.
The time limit for making claims, where not otherwise specified, is four years from the end of the tax year to which the claim relates (Taxes Management Act 1970, s 43). Supplementary claims can be made where an error or mistake has been discovered, provided that the time limit for making the original claim has not expired.
From 2013/14 onwards, eligible partnerships may choose to use the ‘cash basis’. Broadly, where they do taxation of partnership trading profits on the basis of the cash that passes through their books. Instead of spending their time doing calculations designed for big businesses when calculating taxable profit. In essence, most claims procedures should be simplified, if not eliminated, for those using the scheme.
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