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HMRC internal manual

# Partnerships - computation and assessment: examples of allocation of profits and losses

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

## Example 1 (Allocation of partnership profit: no reallocation required)

Alan, Beatrice and Cassandra are in partnership. The partnership makes a profit of £8,900. Alan and Beatrice are entitled to salaries of £2,200 and the balance of profits are shared equally. The partnership profits are allocated as follows

 Alan Beatrice Cassandra Totals Salary £2,200 £2,200 nil £4,400 Balance of profit £1,500 £1,500 £1,500 £4,500 Net Allocated £3,700 £3,700 £1,500 £8,900

In this case the commercial profit sharing arrangement produces a straight apportionment of the actual partnership profit and no further adjustment is required.

## Example 2 (Allocation of partnership profit: reallocation required)

The facts are the same as in example 1 but Alan and Beatrice are each entitled to a salary of £5,200. The balance of profit is shared equally.

The partnership profits would initially be allocated as follows

 Alan Beatrice Cassandra Totals Salary £5,200 £5,200 nil £10,400 Balance of profit (£500) (£500) (£500) (£1,500) Net Allocated £4,700 £4,700 (£500) £8,900

In this case the commercial profit sharing arrangement produces a spurious result. The aggregate notional profit allocated to Alan and Beatrice is £9,400, whilst Cassandra has been allocated a notional loss of (£500).

Therefore the actual partnership profits must be reallocated between the profit making partners.

The re-allocation is made in proportion to the notional profit initially allocated to each partner, i.e. in the ratio

 £(4700) : £(4700) or 50% : 50% £(9400) £(9400)
 Alan Beatrice Cassandra Totals Net Allocated £4,700 £4,700 (£500) £8,900 Percentage (50%) (50%) (0%) Reallocated £4,450 £4,450 nil £8,900

## Example 3 (Allocation of partnership loss: reallocation required)

The facts are the same as in example 1 but Alan is entitled to a salary of £4,400, and profits/losses are shared Alan 25%, Beatrice 25% and Cassandra 50%. This time the partnership makes a loss of (£1,600). The partnership loss is initially allocated as follows

 Alan Beatrice Cassandra Totals Salary £4,400 Nil nil £4,400 Balance of loss (£1,500) (£1,500) (£3,000) (£6,000) Net Allocated £2,900 (£1,500) (£3,000) (£1,600)

In this case the commercial profit sharing arrangement produces a spurious result. A notional profit of £2,900 has been allocated to Alan whilst Beatrice and Cassandra have been allocated an aggregate notional loss of (£4,500).

Therefore the actual partnership loss must be reallocated between the loss making partners. The re-allocation is in proportion to the notional loss initially allocated to each partner, i.e. in the ratio

 (£1500) : (£3000) or 33.3% : 66.7% (£4500) (£4500)
 Alan Beatrice Cassandra Totals Net Allocated £2,900 (£1,500) (£3,000) (£1,600) Percentage (nil) (33.3%) (66.7%) (100%) Reallocated nil (£533) (£1,067) (£1,600)