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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? Are there anti-avoidance provisions to consider?

A guide for subscribers. 

At a glance

Partnerships, their partners and different sources of income

Partnerships come in a number of forms which include general partnerships, limited partnerships and Limited Liability Partnerships (LLPs).

A partnership is normally treated as transparent for tax purposes. 

Note that an LLP that does not carry on a business with a view to profit is treated as opaque rather than transparent.

Partnership Tax Returns

Preparing Partnership Tax Returns

Where a partnership includes individual partners, the Partnership Return should be calculated according to Income Tax principles and include income and disposal proceeds as follows:

Where a partnership is made up only of corporate partners:

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:

While the main body of the partnership return will be prepared on an Income Tax basis as above, any expenses which 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 which 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 2021, 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.

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 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

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 corporate is not coterminous with the accounting period of the partnership of which it is a partner, the corporate 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 2020 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 2020 and 9/12 of the partnership profits for the year to 31 March 2021.

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.

See: Disputed profit share: What do I put in my return?

Anti-avoidance provisions

Anti Avoidance Provisions

There are various anti avoidance provisions to consider for partnerships, see our guides:

Partnerships: Losses

Mixed members: Partnerships with company members

Salaried member

LLPs and loan to participator rules

Partnerships: Restriction in tax relief for intangibles

Transfer of assets and income streams through partnerships