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HMRC internal manual

Business Income Manual

Partnerships - computation and assessment: allocation must not create or increase a loss

S850A, S850B Income Tax (Trading and Other Income) Act 2005, S1263, S1264 Corporation Tax Act 2009

Although the allocation of profit follows the commercial profit sharing arrangement the use of this arrangement alone might produce a spurious result. For instance it would be possible to have an allocation in which one or more partners are allocated an aggregate (but notional) profit greater than the actual profit made by the partnership, and the remaining partners are allocated an aggregate (but notional) loss.

For Income Tax and Corporation Tax purposes the allocation of profit (or loss) between partners must result in a straight apportionment of the actual profit (or loss) made by the partnership. If the initial allocation using the commercial profit sharing arrangement for all the partners produces a mixture of notional profits and losses, you must reallocate the actual partnership profit (or loss) between the profit making (or loss making) partners alone. This re-allocation is made in proportion to the notional profit (or loss) initially allocated to those partners. For examples on how these rules are to be applied, see BIM82250.

In the case of PDC Copyprint v George [1997] SpC326 the Special Commissioners held that it was not open to partners to inflate loss claims by payment of a ‘salary’ to one or more of their number.