L6 Taxation of Partnerships & National Insurance Contributions Flashcards
when does a partnership exist
exist where two or more individuals work together in business with the aim of making a profit
how is a partnership taxable?
the profits are allocated between the partners and each partner is responsible for tax due on his or her share
Partnerships calculated the same way as sole traders, but whats the only difference?
The only additional step is to split the profits according to the partnership agreement – remember each partner is assessed just on his or her share of the taxable trading profits for the tax year
how are profits split between partners?
through the profit sharing agreement.
usually there is a profit sharing ratio between the partners.
what are the methods of partners splitting profits?
- to allocate set ‘salaries’ then share any remaining profits in a set ratio. These salaries are simply allocations of profit and should not be confused with any salaries paid to employees of the partnership.
- the partners to take a percentage on their capital invested in the partnership as part of their share of the profits.
what do you do if the questions said they took drawing and give you a percentage on it?
you less the interest on drawings from what they are owed. i.e. what they will receive in income/salary.
what can the allocation of profits or losses using “salaries”, “interest on capital” and PSR etc. lead too? and what does this mean?
anomalous circumstances. For example it is possible for a partnership to make a profit but one or more partners to be allocated a loss
what is a notional loss?
when a partnership to make a profit but one or more partners to be allocated a loss
note you can also get a notional profit!
what happens when there is a notional loss?
loss must be must be reallocated to the other partners in the same proportion as their profit allocation
what is a notional profit?
partnership overall to make a loss but one or more partner to be allocated a profit
what happens when there is a notional profit?
must be reallocated to the other partners in the same proportion as their loss allocation
formula for reallocating a loss?
(x’s profit for period/(x’s profit for period + y’sprofit for the period) x loss amount recog’d by partners)
assuming x and y are the only partners to make a positive profit. If more add to x and y’s figures and divide x’s profit by the total positive profits made.
if partners have made a loss and only one has made a profit, how much do you reallocate?
reallocate the partners with a losses loss evenly to the partner that made a profit. you reduce the profit as far as NIL. you cannot make this partner incur a loss.
what happens if the partnership agreement changes during the year?
the profit share needs to be calculated on a time apportioned basis for each of the arrangements. Any salaries or interest on capital need to be time apportioned also.
split the accounting period in to two parts and then work out the allocation!
what happens when a new partner joins the partnerships?
the opening year rules apply to that partner, whilst the other partners are assessed on the current year basis as usual. In this situation you could have different basis periods for different partners so it is important to allocate the profits to each partner BEFORE working out the basis of assessment.
time apportion too if necessary!
steps to follow when working out partnership profits to include in an individuals income tax computation are?
a) Adjust partnership trading profits (for disallowable expenses including depreciation, income not included in the accounts, expenses not included in the accounts etc)
b) Calculate and deduct capital allowances to determine the tax adjusted trading profits of the partnership
c) Allocate the tax-adjusted profits between the partners
d) Determine the basis period for EACH PARTNER (not necessarily the same for all partners) and transfer the assessable profits for each partner into their income tax computations
REMEMBER A,B, and D are the same steps as a sole trader!!!
what happens if a partner leaves a partnership during an accounting period?
then this will lead to a change in the partnership profit sharing arrangements (PSA)