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HMRC internal manual

Partnership Manual

Examples of partnership computations with indirect partners

Example 1: Partnership trading income, includes Indirect Partner

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

 

On 1/7/2009 Hunt enters into partnership with Shah Ali; the business continues unchanged.

 

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

30/6/2011.

Boon Partnership is made up of Hannah and Andy Boon.  They commenced trading as a partnership as cleaners on 1 January 2009.  Boon Partnership make up their accounts to 31 December.

 

When Boon Partnership become partners with Hunt and Ali, both Hannah and Andy have a separate notional trade.   

 

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

 

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

 

Hunt and Boon Partnership 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 £30,000
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

  Hunt Ali Boon Partnership
       
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 £10,000 (33.3%) £10,000 (33.3%) £10,000 (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

  Hunt(50%) Boon Partnership (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 Hunt

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 Hunt is deemed to have commenced when the actual trade was first set up. So for Hunt 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 Ali 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 Hunt 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. Ali’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. Ali’s notional trade ceases when he ceases to be a partner in the (continuing) actual trade.

 

Basis periods for Hannah and Andy Boon  

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

  Hunt Ali Hannah Boon Andy Boon
         
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) (£1,000 + 9/12 x 10,000) = £4,750 (£1,000 + 9/12 x 10,000) = £4,750
2011/12 £10,000 £10,000 less overlap relief £9,000 = £1,000 £5,000 (overlap profit £3750) £5,000 (overlap profit £3,750)
2012/13 £17,000   £8,500 £8,500
2013/14 £12,000 less overlap relief £11,250 = £750   £6,000 less overlap relief £3,750= £2,250 £6,000 less overlap relief £3,750 = £2,250

 

Painting and decorating

  Hunt Ali Hannah Boon Andy Boon
         
2013/14 £11,000   £5,500 £5,500
2014/15 £14,000   £7,000 £7,000
2015/16 £18,000   £9,000 £9,000