ACCA TX ^UK Syllabus B. Income Tax And Nic Liabilities - Partnerships and limited liability partnerships - Notes ^{8 / 8}

What is a partnership?

A partnership is a single trading entity, but for taxation purposes each partner is treated individually.

Allocation of the trading profit or trading loss

1. The trading income or trading loss is divided between the partners according to their profit sharing arrangements.

2. Partners may firstly be entitled to salaries and interest on capital. 

   The balance of any trading profit (or loss) will then be allocated in the profit sharing ratio (PSR).

Illustration 1

Peter has been in partnership with Paul for many years.

The partnership's tax adjusted trading profit is £120,000.

The partners share profits equally.

• Required:

  What will Peter's and Paul's share of tax adjusted trading profit be?

Solution

• £120,000 x 1/2 = £60,000

• Peter and Paul will both have £60,000 profit.

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.

Illustration 2

Peter has been in partnership with Paul and Claire.

Paul resigned as a partner on 1 January 2025.

The partnership's tax adjusted trading profit for the year ended 5 April 2025 is £120,000.

The partners have always shared profits equally, and continued to do so after Paul resigned.

• Required:

  What will Peter's share of tax adjusted trading profit be?

  What will Paul's share of tax adjusted trading profit be?

Solution

Tax adjusted trading profit for Paul:

6/4/2024 - 31/12/2024

£120,000 x 9/12 x 1/3 = £30,000
Tax adjusted trading profit for Paul £30,000

• Tax adjusted trading profit for Peter: 

  6/4/2024 - 31/12/2024

  £120,000 x 9/12 x 1/3 = £30,000

• 1/1/2025 - 5/4/2025

  £120,000 x 3/12 x 1/2 = £15,000

• £30,000 + £15,000 = £45,000 profit for Peter

Illustration 3

Canda and Panda are in partnership.

The trading income was £18,000

Profits are shared between Canda and Panda in this ratio 3:2, after paying a salary of £3,000 to Panda. 

Calculate Canda's share of residual trading profits.

Solution:

£18,000 - £3,000 = £15,000 * 3/5 = £9,000

If the question had asked for her total profit share then she would have been entitled to her salary of £3,000 plus the residual profit share of £9,000, giving a total income from the partnership of £12,000.

Illustration 4

Doug and Rob are in partnership. 

The trading income for the year ended 31 March 2025 was £18,000

• Up to 31 December 2024 profits were shared between Doug and Rob 3:2, after paying salaries of £3,000 and £2,000 per annum.

• From 1 January 2025 profits were shared 2:1 after paying salaries of £6,000 and £4,000 per annum.

• Required

  Show the allocation of trading profits for the Accounting Period ended 31 March 2025.

Solution:

Partnership capital allowances

1. Capital allowances are deducted as an expense in calculating trading profit.

2. If assets are used privately, the business proportion is included in the partnership’s capital allowances computation.

Illustration 5

Peter has been in partnership with Paul.

The partnership's tax adjusted trading profit is £120,000. This figure is before taking account of capital allowances.

Capital allowances for the period are £20,000.

The partners share profits equally.

• Required:

  What will Peter's and Paul's share of tax adjusted trading profit be?

Solution

• £120,000 - £20,000 = £100,000
  £100,000 x 1/2 = £50,000

• Peter and Paul will both have £50,000 profit.

Basis of assessment

1. The basis of assessment rules are the same as for a sole trader.

2. The profit is allocated between the partners for accounting periods and then the assessment rules are applied. 

   Just like for a sole trader, a question involving calculation of the assessable profits will always have an accounting period ending on the 31/03 or 05/04.

3. Each partner is effectively taxed as a sole trader on his/her share of the adjusted trading profit

4. When a new partner joins a partnership part way through the year, allocation of profits is split between the two periods.

5. Similarly, when an old partner leaves a partnership part way through the year, allocation of profits is split between the two periods.

As long as there is at least one partner common to the business before and after the change, the partnership continues.

Illustration 6

Ann and Beryl have been in partnership since 6 April 2022 making up their accounts to 5 April each year. On 6 April 2024 Clair joins the partnership.

1) Show the amounts assessed on the individual partners for all relevant tax years of assessment.

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.

3. A partner joining the partnership may claim under opening years loss relief, for losses in the first four tax years of his membership of the partnership. 

   This relief is not available to existing partners.

4. A partner leaving a partnership may claim under terminal loss relief. This relief is not available to partners remaining in the partnership.

Illustration 7

John, James and Paul are in partnership making up their accounts to 5 April. 

During the year, Paul left the partnership and George joined in his place.

During the year, the partnership made a trading loss of £40,000.

• Required:

  State the loss relief claims that will be available to the partners.

Solution