PM163140 - Examples of partnership computations
Example 1: Partnership trading income
On 1/7/2008 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 Wainwright; the business continues unchanged.
A third partner, Hatch, joins the partnership on 06/04/2010. Accounts are made up to 05/04/2010, 30/06/2010, and 30/06/2011.
Wainwright leaves the partnership on 30/06/2011, to set up a new business on his own.
At first Bailey and Hatch continue in partnership, with the business unchanged. But on 30/06/2013 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
| Accounting period | Profit |
|---|---|
| 12 months to 30/06/2009 | £15,000 |
| 9 months to 05/04/2010 | £18,000 |
| 3 months to 30/06/2010 | £6.000 |
| 12 months to 30/06/2011 | £28,000 |
| 12 months to 30/06/2012 | £34,000 |
| 12 months to 30/06/2013 | £24,000 |
Painting and decorating
| Accounting period | Profit |
|---|---|
| 9 months to 05/04/2014 | £22,000 |
| 12 months to 05/04/2015 | £28,000 |
| 12 months to 05/04/2016 | £36,000 |
Step 2
Partnership income is then shared out amongst the partners.
| Travel agency | Bailey | Wainwright | Hatch |
|---|---|---|---|
| 12 months to 30/06/2009 | £15,000 (100%) | - | - |
| 9 months to 05/04/2010 | £9,000 (50%) | £9,000 (50%) | |
| 3 months to 30/06/2010 | £2,000 (330.%) | £2,000 (33.3%) | £2,000 (33.3%) |
| 12 months to 30/06/2011 | £9,333 (33.3%) | £9,333 (33.3%) | £9.333 (33.3%) |
| 12 months to 30/06/2012 | £17,000 (50%) | - | £17,000 (50%) |
| 12 months to 30/06/2013 | £12,000 (50%) | - | £12,000 (50%) |
| Painting and decorating | Bailey (50%) | Hatch (50%) |
|---|---|---|
| 9 months to 05/04/2014 | £11,000 | £11,000 |
| 12 months to 05/04/2015 | £14,000 | £14,000 |
| 12 months to 05/04/2016 | £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 | Year | Statute |
|---|---|---|---|
| 2008/09 | 9 months 01/07/2008 to 05/04/2009 | Year 1 | S199 ITTOIA 2005: Actual basis for year of commencement |
| 2009/10 | 12 months 01/072008 to 30/06/2009 | Year 2 | S200 ITTOIA 2005: 12 months to accounting date |
| 2010/11 | 12 months to 30/06/2010 | 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 05/04/2010 and 30/6/2010, there was no intention to change accounting date. The basis periods continue to be set by reference to 30/06. | Tax year | Basis period | Year | Statute |
|---|---|---|---|---|
| 2011/2012 | 12 months to 30/06/2011 | Year 4 | S198 ITTOIA 2005: 12 months to accounting date | |
| 2012/2013 | 12 months to 30/06/2012 | Year 5 | S198 ITTOIA 2005: 12 months to accounting date. The notional trade is treated as continuing on the departure of Wainwright from 01/07/2011 | |
| 2013/2014 | 12 months to 30/06/2013 | 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 30/06/2013 |
Painting and decorating
| Tax year | Basis Period | Year | Statute |
|---|---|---|---|
| 2013/14 | 9 months 01/07/2013 to 05/04/2014 | 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 |
| 2014/15 | 12 months to 05/04/2015 | Year 2 | S200 ITTOIA 2005: 12 mohths to accounting date |
| 2015/16 | 12 months to 05/04/2016 | Year 3 | S198 ITTOIA 2005: 12 months to accounting date |
.
Basis periods for Wainwright
Travel agency
| Tax year | Basis Period | Year | Statute |
|———-|————–|——|———|
| 2009/10 | 9 months 01/07/2009 to 05/04/2010 | Year 1 | S199 ITTOIA 2005: Actual basis for year of commencement. Wainwright’s notional trade connences when he first became a partner in the actual trade |
| 2010/11 | 12 months to 30/06/2010 | Year 2 | S200 ITTOIA 2005: 12 months to accounting date |
| 2011/12 | 12 months tp 30/06/2011 | 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
| Tax year | Basis Period | Year | Statute |
|———-|————–|——|———|
| 2010/11 | 12 months 06/04/2010 to 05/04/2011 | Year 1 | S199 ITTOIA 2005: Actual basis for year of commencement. |
| 2011/12 | 12 months to 30/06/2011 | Year 2 | S200 ITTOIA 2005: 12 months to accounting date |
| 2012/13 | 12 months to 30/06/2012 | Year 3 | S198 ITTOIA 2005: 12 months to accounting date |
| 2013/14 | 12 months to 30/06/2013 | Year 4 | S202 ITTOIA 2005: period between end of previous basis period and date of cessation |
Painting and decorating
| Tax year | Basis Period | Year | Statute |
|———-|————–|——|———|
| 2013/14 | 9 months 01/07/2013 to 05/04/2014 | Year 1 | S199 ITTOIA 2005: Actual basis period for year of commencement . |
| 2014/15 | 12 months to 05/04/2015 | Year 2 | S200 ITTOIA 2005: 12 months to accounting date. |
| 2015/16 | 12 months to 05/04/2016 | Year 3 | S198 ITTOIA 2005: 12 months to accounting date |
Step 4
Compute assessable income for each tax year.
Travel agency
| Tax year | 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
| Tax year | 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
| Basis period | Profit |
|---|---|
| 12 months to 30/06/2009 | £2,000* |
| 9 months to 05/04/2010 | £2,200 |
| 3 months to 30/06/2010 | £400 |
| 12 months to 30/06/2011 | £3,600 |
| 12 months to 30/06/2012 | £4,000 |
| 12 months to 30/06/2013 | £3,400 |
*Bailey was a sole trader during this period.
Painting and decorating
| Basis period | Profit |
|---|---|
| 9 months to 05/04/2014 | £150 |
| 12 months to 05/04/2015 | £200 |
| 12 months to 05/04/2016 | £210 |
Step 2
The income is then shared out amongst the partners).
Travel agency
| Basis period | Bailey | Wainwright | Hatch |
|————–|——–|————|——-|
| 12 months to 30/6/2009 | £2,000 (100%) | - | - |
| 9 months to 05/4/2010 | £1,100 (50%) | £1,100 (50%) | - |
| 3 months to 30/06/2010 | £333 (33.3%) | £333 (33.3%) | £333 (33.3%) |
| 12 months to 30/06/2011 | £1,200 (33.3%) | £1,200 (33.3%) | £1,200 (33.3%) |
| 12 months to 30/06/2012 | £2,000 (50%) | - | £2,000 (50%) |
| 12 months to 30/06/13 | £1,700 (50%) | - | £1,700 (50%) |
| Painting and decorating | Basis period | Bailey | Hatch |
|---|---|---|---|
| 9 months to 05/4/2014 | £75 (50%) | £75 (50%) | |
| 12 months to 05/04/2015 | £100 (50%) | £100 (50%) | |
| 12 months to 05/04/2016 | £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
| Tax year | Bailey | Wainwright | Hatch |
|———-|——–|————|——-|
| 2008/09 | 9/12 x £2,000= £1,500 | no partnership | no partnership |
| 2009/10 (to 30/06) | 3/12 x £2,000= £500 | no partnership | no partnership |
| 2009/10 (from 01/07) | 9/9 x £1,100= £1,100 | 9/9 x £1,100= £1,100 | no partnership |
| 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 profit £1,100= £100 | £1,200 (overlap profit £900) |
| 2012/13 | £2,000 | no longer a partner | £2,000 |
| 2013/14 | £1,700 less overlap proft £1,100= £600 | no longer a partner | £1,700 less overlap profit £900= £800 |
Painting and decorating
| Tax year | 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
| Basis period | Profit |
|---|---|
| 12 months to 30/06/2009 | £4,000* |
| 9 monthds to 05/04/2010 | £1,200 |
| 3 monthds to 30/06/2010 | £900 |
| 12 months t0 30/06/2011 | £7,200 |
| 12 months to 30/06/2012 | £9,000 |
| 12 months to 30/06/2013 | £11,400 |
|—|
*Bailey was a sole trader during this period
Painting and decorating
| Basis period | Profit |
|————–|——–|
| 9 months to 05/04/2014 | £150 |
| 12 months to 05/04/2015 | £200 |
| 12 months to 05/04/2016 | £250 |
Step 2
The partnership income is then shared out amongst the partners.
Travel Agency
| Basis period | Bailey | Wainwright | Hatch |
|————–|——–|————|——-|
| 12 months to 30/06/2009 | £4,000 (100%) | not yet a partner | not yet a partner |
| 9 months to 05/04/2010 | £600 (50%) | £600 (50%) | not yet a partner |
| 3 months to 30/06/2010 | £300 (33.3%) | £300 (33.3%) | £300 (33.3%) |
| 12 months to 30/06/2011 | £2,400 (33.3%) | £2,400 (33.3%) | £2,400 (33.3%) |
| 12 months to 30/06/2012 | £4,500 (50%) | no longer a partner | £4,500 (50%) |
| 12 months to 30/06/2013 | £5,700 (50%) | no longer a partner | £5,700 (50%) |
Painting and decorating
| Basis period | Bailey | Hatch |
|---|---|---|
| 9 months to 05/04/2014 | £75 (50%) | £75 (50%) |
| 12 months to 05/04/2015 | £100 (50%) | £100 (50%) |
| 12 months to 05/04/2016 | £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
| Tax year | Bailey | Wainwright | Hatch |
|———-|——–|————|——-|
| 2008/09 | 9/12 x £4,000= £3,000 | not yet a partner | not yet a partner |
| 2009/10 (to 30/06) | 3/12 x £4,000= £1,000 | not yet a partner | not yet a partner |
| 2009/10 (from 01/07) | 9/9 x £600= £600 | 9/9 x £600= £600 | not yet a partner |
| 2010/11 | 3/3 x £300 + 9/12 x £2,400= £2,100 | 3/3 x £300 + 9/12 x £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
| Tax year | Bailey | Hatch |
|---|---|---|
| 2013/2014 | £75 | £75 |
| 20/14/2015 | £100 | £100 |
| 2015/2016 | £125 | £125 |