Accountants for Partnerships

Partnerships Self assessment Tax return

Legal status

Partnerships are governed by the Partnership Act 1890, which defines ‘partnership’ as ‘the relationship which subsists between persons carrying on business in common with a view to profit’. ‘Business’ includes every trade, profession or vocation.

Find out more

A partnership agreement is a useful pointer to the existence of a partnership, but there is no necessity for one if the facts corroborate the existence of one without it; nor will an agreement make a partnership if there is not one in fact. The Partnership Act 1890 lays down how profits and losses are to be shared in the absence of agreement to the contrary. Therefore, partners should consider having an agreement in place to forestall the application of the Act.

An important feature of partnership is that those who hold themselves out as partners (e.g. by names on the notepaper) are jointly liable for the debts of the partnership.

In a limited partnership, the liability of one or more of the partners – but not all – is limited.

GM Professional Accountants based in London provide tailor made solutions for Partnerships and ensure that you under the liabilities that come under this type of Structure.

The taxation of profits

Partners are liable to income tax and NICs on the same basis as sole traders

A feature of partnerships is that, while partners may award themselves salaries or interest on capital, as long as they remain partners such payments are not treated as real salaries or real interest, but are added back to assessable profits for tax purposes. However, these payments are treated as legitimate methods of sharing out the profits and so are taken into account in sharing the profits between the partners.

Example

There are three partners: Amy, Beth and Christa. Profits are £71,000 before salaries of £10,000 to Amy and £5,000 to Beth, and after interest on capital of £1,000 to Amy, £2,000 to Beth and £3,000 to Christa. Assuming that profit shares are: Amy, 50%, Beth, 30% and Christa, 20%, the division of the profits proceeds as follows:

Amy Beth Christa
Profit £71,000
Less, salary (£15,000) £10,000 £5,000
Less, interest (£6,000) £1,000 £2,000 £3,000
Profit share (5:3:2) £50,000 £25,000 £15,000 £10,000
Taxable amount £36,000 £22,000 £13,000

Relief for losses

Partners are entitled to loss relief in respect of their share of partnership losses in the same way as other traders. Over recent years, anti-avoidance legislation has been introduced to restrict loss reliefs available to partners in certain circumstances. In particular, there are restrictions on reliefs for non-active partners in the early years of trade and for film trades carried on in partnership.

Where there is an overall profit, but one or more of the partners is allocated a loss, the partners with losses cannot use those losses as tax losses and instead the aggregate of the losses are deducted pro rata from the profits of the partners showing profits. Similarly, where there is an overall loss but some partners show profits, the aggregate profits of the partners showing profits are used to reduce proportionately the losses of the other partners.

Administration

Partners are subject to the same obligations as sole traders ; they must register for Self Assessment with HMRC and submit an annual tax return. In addition, the partnership must submit a tax return to HMRC each year. The partner includes in his/her tax return his/her share of the partnership’s profits and losses, as recorded on the partnership’s tax return.

For VAT purposes, the turnover limit is a limit for the whole partnership and not for each partner.