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HMRC internal manual

Employment Status Manual

Basic principles: how to work out the profits of the intermediary: partnership example - accounts made up to 5 April

This illustrates the case where a partnership’s accounts are made up to 5 April and all income is derived from relevant engagements.

Mr and Mrs I carry on business in partnership and make up their accounts to 5 April 2001. All the partnership’s income is derived from “relevant engagements”. Profits are split equally but Mrs I performs the services. Of the partnership’s expenses, only £2,000 of the £5,000 would be allowable under Employment Income rules.

Partnership Accounts year ended 5 April 2001

Income 25000
Expenses 5000
Profit 20000

Allocated Mrs I 10,000 and Mr I 10,000

Calculation of deemed payment on 5 April 2001

Step One Income from relevant engagements   25000
Step One 5% flat rate allowance 1250  
Step Three Employment Income expenses 2000  
  Total Deductions 3250 3250
  Net   21750
Step Eight Secondary Class 1 NICs on deemed payment   1888
Step Nine Deemed payment   19862

Recalculation of partnership’s taxable profit

Partnership profit 20000
Add Disallowed expenses* 1750
Total 21750
Deduct Secondary Class 1 NICs on deemed payment 1888
Deemed payment 19862
Taxable Trading Income profit  

*The disallowed expenses are based on the excess of the Trading income expenses over the sum of the Employment Income expenses and 5% allowance (5,000 - (2,000+1,250)).

Overall position for 2000/01

Mrs I’s 2000/01 deemed payment is £19,862. She will pay tax chargeable on Employment Income and primary Class 1 NICs based on this amount.

For the purposes of the deemed payment Mrs I is treated as employed by the partnership. For NICs purposes, the partnership is treated as the secondary contributor and liable to pay secondary Class 1 NICs on the amount of the deemed payment.

There is no taxable Trading Income profit.