How to prepare partnership returns. How are partnership profits calculated? How are corporate members of partnerships taxed? What are the differences between the tax treatment of individual and corporate partners?
A guide for subscribers.
At a glance
At a glance
Partnerships, their partners and different sources of income
Partnerships come in several forms which include general partnerships, limited partnerships and Limited Liability Partnerships (LLPs).
A partnership is normally treated as transparent for tax purposes.
- Its activities are deemed, for tax purposes, to be undertaken by its partners.
- Certain partnerships can have a mixture of individuals and corporates as partners. There are differences between the tax principles governing income and corporate taxes and these need to be reflected when calculating the applicable profit shares.
- Some sources of income need to be declared on Partnership Returns in line with the tax year, while others are in line with the partnership accounting period ending in the tax year.
- When preparing the returns for the partners, the income on the Partnership Return is not necessarily the income that needs to be included on the partners' return. See Accounting periods and tax basis periods
Note that an LLP that does not carry on a business with a view to profit or that is in liquidation or is being wound up by order of the court, is not transparent for tax purposes and as such is subject to Corporation Tax on any taxable profits or chargeable gains.
Anti-avoidance rules for partnerships
There are various anti-avoidance provisions applying to partnerships. These include:
- The mixed member rules, see Mixed members: Partnerships with company members
- The salaried member rules see Salaried member
- Special loans to participator rules see LLPs and loan to participator rules
- Partnership loss rules see Partnerships: Losses
- Rules restricting tax relief for intangibles see Partnerships: Restriction in tax relief for intangibles
- Rules governing the transfer of assets and income streams, see Transfer of assets and income streams through partnerships
What's new?
Basis Period reform
2023-24 is the transitional year for basis period reform.
Basis year reform affects any sole trader business or partners in a partnership business that has an accounting period end which ends other than between 31 March to 5 April.
- If you have an accounting year-end which ends on or between 31 March to 5 April, you are already preparing acocunting on 'the tax year basis', this means that Basis year reform has no imparct on you.
The individual partners, not the partnership must report transitional year profits which can be spread over five years. They may elect to use them differently.
Partnerships may wish to decide to change their accounting period to 5 April (or 31 March). This is a decision to be made by the partners.
- It is potentially simplest in terms of reporting to make that change at the start of the 2024/25 tax year.
- As partners will need to calculate their share of partnership profits in a combination of the current year basis and on the tax year basis in 2023/24, the changes to an accounting period date may was well happen at the end of 2023/24.
Finance Act 2022 provides that from April 2024:
- Self-employed trading profits, including partnership profits, will be allocated to tax years regardless of the business’ accounting period end date.
- 2023-24 will be a transitional year with the new rules fully operative from April 2024.
- Where higher profits arise in 2023-24 due to the change in basis, an automatic five-year spreading rule will apply to the additional profits.
Partnership Tax Returns
Preparing Partnership Tax Returns
Where a partnership includes individual partners, the Partnership Return should be calculated according to Income Tax principles, reporting profits and losses and disposal proceeds as follows:
- Trading and professional income for the partnership accounting period ending in the tax year of the Return.
- Untaxed savings, investment and other income arising in the accounting period ending in the tax year of the Return.
- Taxed savings, investment and other income arising in the tax year of the Return, rather than the partnership accounting year.
- Foreign income which has suffered UK tax for the tax year of the Return.
- Foreign income which has not suffered UK tax for the accounting period ending in the tax year of the Return.
- UK property income arising in the accounting period ending in the tax year of the Return.
- Disposal proceeds for chargeable disposals in the tax year of the Return.
- For an investment partnership, where no trade or profession is carried on, return all income arising in the tax year irrespective of the accounting year-end.
Where a partnership is made up only of corporate partners:
- Return all sources of income and disposal proceeds arising in the accounting period of the partnership ending in the tax year.
If a partnership has losses see Partnerships: Losses
Extra considerations for partnerships with individual and corporate members
Some expenses which would not be allowed for Income Tax purposes may be allowed for Corporation Tax purposes and vice versa.
This can include:
- Management expenses
- Loan relationships
- Tonnage tax (if applicable)
While the main body of the partnership return will be prepared on an Income Tax basis as above, any expenses that would be allowable for a corporate member need to be allocated to the corporate partners in line with their applicable profit-sharing ratio. The share of any such expense that would be allocated to individual partners is lost. Details should be included in the Additional Information on the Partnership Return.
Example 1:
Andrew and B Ltd are members of C LLP. C LLP has an investment business.
Both Andrew and B Ltd have a 50% share of LLP profits which are £100,000 for the year under Income Tax principles.
C LLP also has what would be management expenses under Corporation Tax principles totalling £10,000. As B Ltd has a 50% profit share, it can include a deduction of 50% of the management expenses. Andrew's 50% share of the management expenses are not available as a deduction for him and are lost.
The taxable profit share for Andrew is £50,000 and the taxable profit share for B Ltd is £45,000.
Example 2:
Wendy and Y Ltd are members of Z LLP each having a 50% profit share. Z LLP runs a residential property investment business.
For the year to 5 April 2023, rental income less expenses other than finance costs total £100,000. Finance costs total £20,000.
Under Income Tax principles Wendy has a profit share of £50,000 and is entitled to a basic rate deduction of her share of the £10,000 of finance costs as Relief for mortgage interest is restricted.
Y Ltd's profit share is £40,000. This is after deducting its 50% share of the finance costs which represent a non-trading loan relationship deficit.
Capital allowances: corporate and mixed partnerships
The corporate members of mixed partnerships, and companies within a corporate partnership, can benefit from First Year Allowances (FYAs) such as the Super-deduction and full expensing, notwithstanding that these allowances are not normally available to partnerships. See:
Where a partnership has a corporate member, the partnership is not a 'qualifying person' for the purposes of the Annual Investment Allowance (AIA). This means that the partnership's members cannot benefit from AIA in respect of the partnership.
Tax Returns for the partners
The tax returns of the partners
Individual Partners
As the default basis for preparing the partnership return is based on Income Tax principles, an individual is subject to tax on their share of the profit which has been included in the Partnership Return.
No further adjustment is required unless the opening or closing year rules apply. See Accounting periods and tax basis periods
Basis Period reform
2023-24 is the transitional year for basis period reform.
Basis year reform affects any sole trader business or partners in a partnership business that has an accounting period end which ends other than between 31 March to 5 April.
- If you have an accounting year-end which ends on or between 31 March to 5 April, you are already preparing acocunting on 'the tax year basis', this means that Basis year reform has no imparct on you.
The individual partners, not the partnership must report transitional year profits which can be spread over five years. They may elect to use them differently.
Partnerships may wish to decide to change their accounting period to 5 April (or 31 March). This is a decision to be made by the partners.
- It is potentially simplest in terms of reporting to make that change at the start of the 2024/25 tax year.
- As partners will need to calculate their share of partnership profits in a combination of the current year basis and on the tax year basis in 2023/24, the changes to an accounting period date may was well happen at the end of 2023/24.
Finance Act 2022 provides that from April 2024:
- Self-employed trading profits, including partnership profits, will be allocated to tax years regardless of the business’ accounting period end date.
- 2023-24 will be a transitional year with the new rules fully operative from April 2024.
- Where higher profits arise in 2023-24 due to the change in basis, an automatic five-year spreading rule will apply to the additional profits.
Corporate Partners
A corporate partner needs to calculate any Corporation Tax liability in line with its own accounting period.
If the accounting year of the company is not coterminous with the accounting period of the partnership of which it is a partner, the company needs to apportion the profits of the two applicable partnership accounting periods accordingly.
For example, if the company has an accounting year ending 31 December 2022 and the partnership has an accounting date of 31 March, the corporate tax return needs to reflect 3/12 of the partnership profits to 31 March 2022 and 9/12 of the partnership profits for the year to 31 March 2023.
Partnership profit disputes
Partners are assessed on the profits they have been allocated in the partnership tax return. In the event of disputes, the Tribunal can be asked to adjudicate.
