Particular topics: companies in partnership: computation of profits and losses
CTA09/PART17 sets out the rules by which partnership profits are to be calculated, allocated and assessed when at least one member of a partnership is a company within the charge to CT. There are three steps to follow:
- Step 1: calculate the profits or losses of the partnership’s trade, profession or business (see CTM36560) for its accounting period as though the partnership was a company. For this purpose
* no account is taken of any losses for another accounting period, and * the CT rule prohibiting the deduction of a distribution (CTA09/S1305) in computing income does not apply - so a distribution which, apart from this prohibition, would be allowable on normal principles, for instance interest treated as a distribution, may be deducted.
- Step 2: determine, according to its interest in the partnership in that accounting period, the company’s share of the partnership’s profit or loss arrived at above, and any amount excluded from that profit or loss.
- Step 3: the company’s share is brought into charge under CTA09/S2 as if its profit share derived from a trade, profession or business it carried on alone. The trade, profession or business carried on in partnership is a separate trade, etc. from any other trade, etc. that the company carries on alone.
For accounting period purposes, the partnership (or ‘firm’) is treated as though it were a company (CTA09/S1261 (1)) and various assumptions are made dealing with residence, trade commencement, cessation and change in the persons carrying it on in circumstances where there is no company partner continuity (CTA09/S1261 (2) to (6)). For any accounting period of the firm a partner’s share of trade profit or loss is determined according to the firm’s profit sharing arrangements during that period. Qualifying charitable donations are allocated for CT purposes in accordance with profit sharing arrangements of the accounting period of the partnership in which the qualifying donations are made.
CTA09/S1263 and S1264 deal respectively with
- the situation where there is a profit in the firm but some partners have losses. and
- the situation where there is a loss in the firm but some partners have profits
by allocating the profit (or loss) of the firm in proportion to the profits of the profitable partners (or losses of the loss making partners). The share of a loss making member of a profitable partnership, or profitable member of a loss making partnership, is treated as no profit/no loss.
Where the firm’s notional accounting period differs from that of a company partner, the share of the profit or loss for the notional accounting period is apportioned between the accounting periods of the company which fall within that period. Usually this will be on a time basis under CTA09/S52 or S1307. But apportionment may not be ‘necessary’ where a more accurate measure of the profits for any accounting period can be found – see Marshall Hus & Partners v Bolton (1984) 55TC539.
If there are members of the partnership chargeable to income tax refer to BIM82200 onwards for guidance on the computation of their tax liability.
The CT charged on a company partner in respect of its share of partnership profits is not a partnership debt. None of the other partners are therefore liable for that tax.