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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Partnerships - computation and assessment: partner’s notional trade: change of partnership accounting date

S214-S220, S853 Income Tax (Trading and Other Income) Act 2005

Individual partners are bound by the accounting dates adopted by the partnership. In other words the basis periods for each notional trade are always in alignment with the accounting periods used for the actual partnership business unless the special commencement or cessation rules apply to the individual partner’s notional trade.

Where a partnership changes its accounting date special rules maintain this alignment. The underlying principle is that you apply the change of accounting date rules (see BIM81035 onwards) to the partnership as if it were an individual.

If the partnership satisfies the relevant conditions then the new accounting date is effective for Income Tax purposes. Each partner uses the new date to determine their basis period for the year of change.

If the partnership does not satisfy the relevant conditions then the new accounting date is not effective for Income Tax purposes. Each partner has to use the old date to determine their basis period for the year of change.

The partnership is responsible for ensuring that the relevant conditions for a change of basis period are met.

Thus the following rules concerning:

  • automatic change in first three years of business,
  • no period of account to exceed 18 months,
  • no change resulting in a new date determining the basis period for a year in previous five years, and
  • latest change made for genuine commercial reasons,

automatically apply to a partnership as if the partnership were an individual.

Notification of a change of accounting date and any appeal against a notice issued by HMRC must be made at partnership level. The partners may nominate any partner to give such a notice, or make such an appeal, on behalf of the partnership.

Example 1 (New date effective for Income Tax purposes)

John Smith and Stephen West have been trading as fishmongers for some years. Their accounting date is 5 April. On 1/10/2011 Thomas Pym joins the firm. It is decided that from the following year the accounting date should change to 30 April. Accounts are prepared as follows

12 months to 5/4/2011
   
12 months to 5/4/2012
1 month to 30/4/2012
12 months to 30/4/2013

The partnership must satisfy the relevant conditions as if it were an individual. The first accounting period to the new date does not exceed 18 months and there have been no changes of accounting date in the past five years. Providing the nominated partner gives the required notice the relevant conditions are satisfied.

If so the new date is effective for tax purposes and the partners’ basis periods will be as follows:

Partner 2010/11   2011/12  
         
Smith 12 months to 5/4/11 S198 ITTOIA 2005 12 months to 5/4/12 S198 ITTOIA 2005
West 12 months to 5/4/11 S198 ITTOIA 2005 12 months to 5/4/12 S198 ITTOIA 2005
Pym     6 months to 5/4/12 S199 ITTOIA 2005
Partner 2012/13   2013/14  
Smith 12 months to 30/4/12 S216(2) ITTOIA 2005 12 months to 30/4/13 S198 ITTOIA 2005
West 12 months to 30/4/12 S216(2) ITTOIA 2005 12 months to 30/4/13 S198 ITTOIA 2005
Pym 12 months to 30/9/12 S200 ITTOIA 2005 12 months to 30/4/13 S198 ITTOIA 2005

 

Example 2 (New date not effective for Income Tax purposes)

The facts are the same as in example 1 but if the relevant conditions are not satisfied - for example, because the partnership failed to give the required notice - then all three partners have to determine their basis periods by reference to the old date.

Partner 2010/11   2011/12  
         
Smith 12 months to 5/4/11 S198 ITTOIA 2005 12 months to 5/4/12 S198 ITTOIA 2005
West 12 months to 5/4/11 S198 ITTOIA 2005 12 months to 5/4/12 S198 ITTOIA 2005
Pym     6 months to 5/4/12 S199 ITTOIA 2005
Partner 2012/13   2013/14  
Smith 12 months to 5/4/13 S216(4) ITTOIA 2005 12 months to 5/4/14 S219 ITTOIA 2005
West 12 months to 5/4/13 S216(4) ITTOIA 2005 12 months to 5/4/14 S219 ITTOIA 2005
Pym 12 months to 5/4/13 S200 ITTOIA 2005 12 months to 5/4/14 S219 ITTOIA 2005