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HMRC internal manual

# Partnerships - computation and assessment: examples of partnership computations

## Example 1: Partnership trading income

On 1/7/2008 George Bailey sets up in business on his own, as a travel agent, and produces accounts to 30/6/2009.

On 1/7/2009 Bailey enters into partnership with Sam Wainwright; the business continues unchanged.

A third partner, Mary Hatch, joins the partnership on 6/4/2010. Accounts are made up to 5/4/2010, 30/6/2010, and 30/6/2011.

Wainwright leaves the partnership on 30/6/2011, to set up a new business on his own.

At first Bailey and Hatch continue in partnership, with the business unchanged. But on 30/6/2013 the existing partnership business is sold.

Bailey and Hatch commence a new business, of painting and decorating, on 1/7/2013 and accounts are made up to 5/4 each year thereafter.

In both businesses income is shared equally throughout.

### Step 1

Partnership income is computed using normal trading income rules, as for individuals.

Assume the income for each accounting period is as follows

Travel agency

 12 months to 30/6/2009 £15,000 9 months to 5/4/2010 £18,000 3 months to 30/6/2010 £6,000 12 months to 30/6/2011 £28,000 12 months to 30/6/2012 £34,000 12 months to 30/6/2013 £24,000

Painting and decorating

 9 months to 5/4/2014 £22,000 12 months to 5/4/2015 £28,000 12 months to 5/4/2016 £36,000

### Step 2

Partnership income is then shared out amongst the partners.

Travel agency

 Bailey Wainwright Hatch 12 months to 30/6/2009 £15,000 (100%) 9 months to 5/4/2010 £9,000 (50%) £9,000 (50%) 3 months to 30/6/2010 £2,000 (33.3%) £2,000 (33.3%) £2,000 (33.3%) 12 months to 30/6/2011 £9,333 (33.3%) £9,333 (33.3%) £9,333 (33.3%) 12 months to 30/6/2012 £17,000 (50%) £17,000 (50%) 12 months to 30/6/2013 £12,000 (50%) £12,000 (50%)

Painting and decorating

 Bailey (50%) Hatch (50%) 9 months to 5/4/2014 £11,000 £11,000 12 months to 5/4/2015 £14,000 £14,000 12 months to 5/4/2016 £18,000 £18,000

### Step 3

Basis periods are determined for each partner, as if that partner were carrying on a trade on their own.

Basis periods for Bailey

Travel agency

 Basis Period Statute 2008/09 9 months 1/7/08 to 5/4/09 Year 1 S199 ITTOIA 2005: Actual basis for year of commencement. 2009/10 12 months 1/7/ 08 to 30/6/09 Year 2 S200 ITTOI 2005: 12 months to accounting date. 2010/11 12 months to 30/6/10 Year 3 S198 ITTOIA 2005: 12 months to accounting date.

Although the trade is now carried on in partnership, the notional trade now carried on by Bailey is deemed to have commenced when the actual trade was first set up. So for Bailey this is still ‘Year 3’.

 Although accounts were made up to 5/4/2010 and 30/6/2010, there was no intention to change accounting date. The basis periods continue to be set by reference to 30/6. 2011/12 12 months to 30/6/11 Year 4 S198 ITTOIA 2005: 12 months to accounting date. 2012/13 12 months to 30/6/12 Year 5 S198 ITTOIA 2005: 12 months to accounting date. The notional trade is treated as continuing on the departure of Wainwright from 1/7/11. 20013/14 12 months to 30/6/13 Year 6 S202 ITTOIA 2005: period between end of previous basis period and date of cessation. Notional trade treated as permanently discontinued when Bailey ceases to carry on the actual trade on its sale on 30/6/13.

Painting and decorating

 Basis Period Statute 2013/14 9 months 1/7/13 to 5/4/14 Year 1 S199 ITTOIA 2005: Actual basis for year of commencement. This is a new actual trade and therefore a new notional trade and the commencement basis applies. 2014/15 12 months to 5/4/15 Year 2 S200 ITTOIA 2005: 12 months to accounting date. 2015/16 12 months to 5/4/16 Year 3 S198 ITTOIA 2005: 12 months to accounting date.

Basis periods for Wainwright

Travel agency

 Basis Period Statute 2009/10 9 months 1/7/09 to 5/4/10 Year 1 S199 ITTOIA 2005: Actual basis for year of commencement. Wainwright’s notional trade commences when he first became a partner in the actual trade. 2010/11 12 months to 30/6/10 Year 2 S200 ITTOIA 2005: 12 months to accounting date. 2011/12 12 months 1/7/10 to 30/6/11 Year 3 S202 ITTOIA 2005: period between end of previous basis period and date of cessation. Wainwright’s notional trade ceases when he ceases to be a partner in the (continuing) actual trade.

Basis periods for Hatch

Travel agency

 Basis Period Statute 2010/11 12 months 6/4/10 to 5/4/11 Year 1 S199 ITTOIA 2005: Actual basis for year of commencement. 2011/12 12 months to 30/6/11 Year 2 S200 ITTOIA 2005: 12 months to accounting date. 2012/13 12 months to 30/6/12 Year 3 S198 ITTOIA 2005: 12 months to accounting date. 2013/14 12 months to 30/6/13 Year 4 S202 ITTOIA2005: period between end of previous basis period and date of cessation.

Painting and decorating

 Basis Period Statute 2013/14 9 months 1/7/13 to 5/4/14 Year 1 S199 ITTOIA 2005: Actual basis for year of commencement. 2014/15 12 months to 5/4/15 Year 2 S200 ITTOIA 2005: 12 months to accounting date. 2015/16 12 months to 5/4/16 Year 3 S198 ITTOIA 2005: 12 months to accounting date.

### Step 4

Compute assessable income for each tax year.

Travel agency

 Bailey Wainwright Hatch 2008/09 9/12 x £15,000 = £11,250 2009/10 12/12 x £15,000 = £15,000 (overlap profit £11,250) 9/9 x £9,000 = £9,000 2010/11 (£9,000 + £2,000) = £11,000 (£9,000 + £2,000) = £11,000 (overlap profit 9,000) (£2,000 + 9/12 x 9,333) = £9,000 2011/12 £9,333 £9,333 less overlap relief £9,000 = £333 £9,333 (overlap profit £7,000) 2012/13 £17,000 £17,000 2013/14 £12,000 less overlap relief £11,250 = £750 £12,000 less overlap relief £7,000 = £5,000

Painting and decorating

 Bailey Wainwright Hatch 2013/14 £11,000 £11,000 2014/15 £14,000 £14,000 2015/16 £18,000 £18,000

## Example 2: Other income

The facts are the same as in example 1.

If those partnerships have additional non-trading income that is untaxed income (say savings income) then wherever possible that income is chargeable using the basis periods identified in example 1.

If those partnerships have taxed income that is not a trading receipt (say dividend income) that income is chargeable on a tax year (6 April to 5 April) basis.

### Untaxed income

Step 1

Compute the untaxed income using normal savings income rules, as for individuals.

Assume the untaxed interest arising to each business is as follows:

Travel agency

 12 months to 30/6/2009 £2,000* 9 months to 5/4/2010 £2,200 3 months to 30/6/2010 £400 12 months to 30/6/2011 £3,600 12 months to 30/6/2012 £4,000 12 months to 30/6/2013 £3,400

*Bailey was a sole trader during this period.

Painting and decorating

 9 months to 5/4/2014 £150 12 months to 5/4/2015 £200 12 months to 5/4/2016 £210

Step 2

The income is then shared out amongst the partners).

Travel agency

 Bailey Wainwright Hatch 12 months to 30/6/2009 £2,000 (100%) 9 months to 5/4/2010 £1,100 (50%) £1,100 (50%) 3 months to 30/6/2010 £133 (33.3%) £133 (33.3%) £134 (33.3%) 12 months to 30/6/2011 £1,200 (33.3%) £1,200 (33.3%) £1,200 (33.3%) 12 months to 30/6/2012 £2,000 (50%) £2,000 (50%) 12 months to 30/6/2013 £1,700 (50%) £1,700 (50%)

Painting and decorating

 Bailey Hatch 9 months to 5/4/2014 £75 (50%) £75 (50%) 12 months to 5/4/2015 £100 (50%) £100 (50%) 12 months to 5/4/2016 £105 (50%) £105 (50%)

Step 3

The basis periods for each partner are the notional trade basis periods except that for the first 12 months Bailey carried on the business as a sole trader. Therefore for the period up to 1/7/09 whilst Bailey was a sole trader:

• any untaxed income arising in this period is chargeable on a tax year (6 April to 5 April) basis, not on an accounts basis,
• the notional business used to determine the basis periods for Bailey’s share of untaxed income commences on 1/7/2009.

Step 4

The income is chargeable as follows:

Travel agency

 Bailey Wainwright Hatch 2008/09 9/12 x £2,000 = £1,500 no partnership no partnership 2009/10 (to 30/6) 3/12 x £2,000 = £500 no partnership no partnership 2009/10 (from 1/7) 9/9 x £1,100 = £1,100 9/9 x £1,100 = £1,100 not yet a partner 2010/11 (£1,100 + £133) = £1,233 (overlap profit £1,100) (£1,100 + £133) = £1,233 (overlap profit £1,100) (£134 + 9/12 x £1,200) = £1034 2011/12 £1,200 £1,200 less overlap relief £1,100 = £100 £1,200 (overlap profit £900) 2012/13 £2,000 no longer a partner £2,000 2013/14 £1,700 less overlap relief £1,100 = £600 no longer a partner £1,700 less overlap relief £900 = £800

Painting and decorating

 Bailey Hatch 2013/14 £75 £75 2014/15 £100 £100 2015/16 £105 £105

### Taxed income

Step 1

The gross dividend income is computed as for individuals.

Assume the income for each period of account is as follows:

Travel agency

 12 months to 30/6/2009 £4,000* 9 months to 5/4/2010 £1,200 3 months to 30/6/2010 £900 12 months to 30/6/2011 £7,200 12 months to 30/6/2012 £9,000 12 months to 30/6/2013 £11,400

*Bailey was a sole trader during this period

Painting and decorating

 9 months to 5/4/2014 £150 12 months to 5/4/2015 £200 12 months to 5/4/2016 £250

Step 2

The partnership income is then shared out amongst the partners.

Travel Agency

 Bailey Wainwright Hatch 12 months to 30/6/2009 £4,000 (100%) not yet a partner not yet a partner 9 months to 5/4/2010 £600 (50%) £600 (50%) not yet a partner 3 months to 30/6/2010 £300 (33.3%) £300 (33.3%) £300 (33.3%) 12 months to 30/6/2011 £2,400 (33.3%) £2,400 (33.3%) £2,400 (33.3%) 12 months to 30/6/2012 £4,500 (50%) no longer a partner £4,500 (50%) 12 months to 30/6/2013 £5,700 (50%) no longer a partner £5,700 (50%)

Painting and decorating

 Bailey Hatch 9 months to 5/4/2014 £75 (50%) £75 (50%) 12 months to 5/4/2015 £100 (50%) £100 (50%) 12 months to 5/4/2016 £125 (50%) £125 (50%)

Step 3

The taxed income is chargeable on a tax year basis. Income must be apportioned accordingly.

Step 4

Compute taxed income attributable to each partner for each tax year.

Travel Agency

 Bailey Wainwright Hatch 2008/09 9/12 x £4,000 = £3,000 not yet a partner not yet a partner 2009/10 (to 30/6) 3/12 x £4,000 = £1,000 not yet a partner not yet a partner 2009/10 (from 1/7) 9/9 x £600 = £600 9/9 x £600 = £600 not yet a partner 2010/011 3/3 x £300 + 9/12 x £2,400 = £2,100 3/3 x £300 + 9/12x £2,400 = £2,100 3/3 x £300 + 9/12 x £2,400 = £2,100 2011/12 3/12 x £2,400+ 9/12 x £4,500 = £3,975 3/12 x £2,400 = £600 3/12 x £2,400 + 9/12 x £4,500 = £3,975 2012/13 3/12 x £4,500+ 9/12 x £5,700 = £5,400 No longer a partner 3/12 x £4,500 + 9/12 x £5,700 = £5,400 2013/14 3/12 x £5,700 = £1,425 no longer a partner 3/12 x £5,700 = £1,425

Painting and decorating

 Bailey Hatch 2013/14 £75 £75 2014/15 £100 £100 2015/16 £125 £125