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HMRC internal manual

Partnership Manual

HM Revenue & Customs
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Calculating the taxable profits: allocating the taxable profits or allowable losses to partners

Profits are allocated to the partners in accordance with the profit sharing arrangements agreed between them and in force during the relevant period. These cannot be varied retrospectively.

There is an important rule that you need to be aware of. Although a partnership’s commercial profit sharing arrangements may result in an allocation of profits to some members and losses to other members, for tax purposes, one partner cannot be allocated a profit whilst another is allocated a loss and vice versa.

The allocation of profit (or loss) between partners must result in a straight apportionment of the actual profit (or loss) made by the partnership. If the initial allocation using the commercial profit sharing arrangement for all the partners produces a mixture of notional profits and losses, you must reallocate the actual partnership profit (or loss) between the profit making (or loss making) partners alone. This re-allocation is made in proportion to the notional profit (or loss) initially allocated to those partners. The statutory provisions for this are at ITTOIA05/S850, S850A and S850B. Further guidance and examples of how this works can be found at BIM82245 and BIM82250