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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 a date other than 5 April

Paragraph 18(2) Schedule 12 Finance Act 2000

This illustrates the case of an on-going business where:
 

  • accounts are made up to date other than 5 April; and
  • all income is derived from relevant engagements

Mr and Mrs B carry on business in partnership and make up their accounts to 30 September each year. They split profits equally but Mr B performs the services. Relief for the deemed payment is given in the accounting period in which it arises.

Partnership accounts show the following figures:
 

Year ended 30.9.2001 30.9.2002
     
Income 25000 30000
Expenses 5000 6000
Profit 20000 24000
Mr B 10000 12000
Mrs B 10000 12000

Calculation of deemed payment
 

Year ended   5.4.2001 5.4.2002 5.4.2003
         
Step One Income 27500 33000 40000
  Deduct      
Step One 5% flat rate allowance 1375 1650 2000
Step Three Employment Income expenses 3000 4000 5000
    4375 5650 7000
  Net 23125 27350 33000
Step Eight Secondary Class 1 NICs 2038 2498 3112
Step Nine Deemed payment 21087 24852 29888

Recalculation of partnership’s taxable profit

Revised profit year ended 30.9.2001
 

| Partnership profit |   | 20000 | || | Add Disallowed expenses* |   | 625 | | Total |   | 20625 | | Deduct Secondary Class 1 NICs on deemed
Payment
Deemed Payment | 2,038
21,087
  |   | | Total deductions | 23125 | 20,625+ | | 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 - (3,000+1,375)).

+The sum of the deemed payment and secondary Class 1 NICs (21,087+2,038=23,125) is greater than the adjusted Trading Income profit (20,625). Therefore, the deduction is limited to the amount that reduces the taxable profit to nil.

Revised profit year ended 30.9.2002
 

| Partnership profit |   | 24000 | || | Add Disallowed expenses* |   | 350 | | Total |   | 24350 | | Deduct Secondary Class 1 NICs on deemed
Payment
Deemed payment | 2,498
24,852
  |   | | Total deductions | 27350 | 24,350+ | | 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 (6,000 - (4,000+1,650)).

+The sum of the deemed payment and secondary Class 1 NICs is greater than the adjusted Trading Income profit so the deduction is limited to the amount that reduces the taxable profit to nil (paragraph 18(2) Schedule 12 Finance Act 2000).

Overall tax position 2001/02
 

  Mr B Mrs B
     
Trading Income    
Employment Income 24852  

Overall tax position 2002/03
 

  Mr B Mrs B
     
Trading Income    
Employment Income 29888