ACC3140 Taxation
Unit 9 Partnerships
LEARNING OUTCOMES:
Describe the principles of partnership taxation.
Adjust and allocate partnership profits and losses.
Deal with notional losses.
Give effect to changes in partnership composition.
Allocate non-trading income between the partners.
Comment in the role of partnerships in tax planning.
Describe the basic principles of the taxation of an LLP, including restrictions on loss relief.
EXISTENCE OF A PARTNERSHIP:
A number of people enter into a business venture on the basis that they share profits and
losses
Usually a formal agreement
Not a legal entity
PRINCIPLES OF PARTNERSHIP TAXATION:
Adjusted profits reported to HMRC on partnership return, but
Profits assessed on partners separately
PARTNERSHIP RETURN:
o Partnership submits a return, showing
o Profits adjusted for tax purposes
Adjusted in the usual way
o Allocation of profit between partners
o Partners show these figures on their own personal tax returns
o Each partner then taxed as if a sole trader
o Trade treated as starting when partner joins the partnership
o Ceases when partner leaves
o Each partner pays his/her own tax
ADJUSTMENT OF PROFITS
Profits calculated as for sole traders
‘Salaries’ are drawings, not expenses
o Add back
, Also add back interest charged on partners’ capital
ALLOCATION OF PROFITS:
Allocate in accordance with the profit-sharing ratio (PSR) in the partnership agreement
Need not be 50:50
Allocate salaries and interest on capital first
Example:
Morecambe & Wise split profits in the ratio 2:3 after paying a ‘salary’ of £5,000 a year to
Morecambe and a ‘salary’ of £4,000 a year to Wise.
For the year ended 31st of December 2022, the partnership made a profit of £34,000.
Allocate the profits between the partners.
M W Total
Salaries 5000 4000 9000
Profits (bal- 2:3) 10000 15000 25000
total 15000 19000 34000
LECTURE ACTIVITY:
Tony and Gordon are in partnership. The tax adjusted profit for the year ended 30 September 2022
was £37,000. The profit sharing ratio between Tony and Gordon was 2:1, after paying annual
‘salaries’ of £4,000 and £3,000.
Show how profits for the year ended 30 September 2022 are allocated between the partners.
T G Total
Salaries 4000 3000 7000
Profits (bal- 2:3) 20000 10000 30000
total 24000 13000 37000
ALLOCATION OF PROFITS:
If PSR changes during period of account, must time-apportion profit
Apply old PSR to profit before the change
Apply new PSR to profit after change
LECTURE ACTIVITY:
Boris and John are in partnership. The tax adjusted profit for the year ended 30 September 2022 was
£18,000. Until 30 June 2022 the profit sharing ratio between Boris and John was 2:1, after paying
annual salaries of £4,000 and £3,000. From 1 July 2022 profits were shared 3:2 after paying annual
salaries of £7,000 and £5,000.
Show how profits for the year ended 30 September 2022 are allocated between the partners.
T G total
1 Oct 2021 to 30 June
Unit 9 Partnerships
LEARNING OUTCOMES:
Describe the principles of partnership taxation.
Adjust and allocate partnership profits and losses.
Deal with notional losses.
Give effect to changes in partnership composition.
Allocate non-trading income between the partners.
Comment in the role of partnerships in tax planning.
Describe the basic principles of the taxation of an LLP, including restrictions on loss relief.
EXISTENCE OF A PARTNERSHIP:
A number of people enter into a business venture on the basis that they share profits and
losses
Usually a formal agreement
Not a legal entity
PRINCIPLES OF PARTNERSHIP TAXATION:
Adjusted profits reported to HMRC on partnership return, but
Profits assessed on partners separately
PARTNERSHIP RETURN:
o Partnership submits a return, showing
o Profits adjusted for tax purposes
Adjusted in the usual way
o Allocation of profit between partners
o Partners show these figures on their own personal tax returns
o Each partner then taxed as if a sole trader
o Trade treated as starting when partner joins the partnership
o Ceases when partner leaves
o Each partner pays his/her own tax
ADJUSTMENT OF PROFITS
Profits calculated as for sole traders
‘Salaries’ are drawings, not expenses
o Add back
, Also add back interest charged on partners’ capital
ALLOCATION OF PROFITS:
Allocate in accordance with the profit-sharing ratio (PSR) in the partnership agreement
Need not be 50:50
Allocate salaries and interest on capital first
Example:
Morecambe & Wise split profits in the ratio 2:3 after paying a ‘salary’ of £5,000 a year to
Morecambe and a ‘salary’ of £4,000 a year to Wise.
For the year ended 31st of December 2022, the partnership made a profit of £34,000.
Allocate the profits between the partners.
M W Total
Salaries 5000 4000 9000
Profits (bal- 2:3) 10000 15000 25000
total 15000 19000 34000
LECTURE ACTIVITY:
Tony and Gordon are in partnership. The tax adjusted profit for the year ended 30 September 2022
was £37,000. The profit sharing ratio between Tony and Gordon was 2:1, after paying annual
‘salaries’ of £4,000 and £3,000.
Show how profits for the year ended 30 September 2022 are allocated between the partners.
T G Total
Salaries 4000 3000 7000
Profits (bal- 2:3) 20000 10000 30000
total 24000 13000 37000
ALLOCATION OF PROFITS:
If PSR changes during period of account, must time-apportion profit
Apply old PSR to profit before the change
Apply new PSR to profit after change
LECTURE ACTIVITY:
Boris and John are in partnership. The tax adjusted profit for the year ended 30 September 2022 was
£18,000. Until 30 June 2022 the profit sharing ratio between Boris and John was 2:1, after paying
annual salaries of £4,000 and £3,000. From 1 July 2022 profits were shared 3:2 after paying annual
salaries of £7,000 and £5,000.
Show how profits for the year ended 30 September 2022 are allocated between the partners.
T G total
1 Oct 2021 to 30 June
