SolvedPM163150 | Examples of partnership computations with indirect partners
From HM Revenue & Customs · Partnership Manual
Example 1: Partnership trading income, includes Indirect Partner
On 1/7/2008 David sets up in business on his own, as a travel agent, and produces accounts to 30/6/2009.
On 1/7/2009 David enters into partnership with Alexis; the business continues unchanged.
A third partner, Rose Partnership, joins the partnership on 6/4/2010. Accounts are made up to 5/4/2010, 30/6/2010, and
30/6/2011.
Rose Partnership is made up of Johnny and Moira Rose. They commenced trading as a partnership as cleaners on 1 January 2009. Rose Partnership make up their accounts to 31 December.
When Rose Partnership become partners with David and Alexis, both Johnny and Moira have a separate notional trade.
Alexis leaves the partnership on 30/6/2011, to set up a new business on her own.
At first David and Rose Partnership continue in partnership, with the business unchanged. But on 30/6/2013 the existing partnership business is sold.
David and Rose 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
| Accounting period | Profit |
|---|---|
| 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
| Accounting period | Profit |
|---|---|
| 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
| Accounting period | David | Alexis | Rose 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
| Accounting period | David (50%) | Rose 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 David
Travel agency
| Tax year | Basis Period | Year | 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 David is deemed to have commenced when the actual trade was first set up. So for David 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 Alexis 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 David ceases to carry on the actual trade on its sale on 30/6/13. |
Painting and decorating
| Tax year | Basis Period | Year | 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 Alexis
Travel agency
| Tax year | Basis Period | Year | Statute |
|---|---|---|---|
| 2009/10 | 9 months 1/7/09 to 5/4/10 | Year 1 | S199 ITTOIA 2005: Actual basis for year of commencement. Alexis’ notional trade commences when she 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. Alexis’ notional trade ceases when she ceases to be a partner in the (continuing) actual trade. |
Basis periods for Johnny and Moira Rose
Travel agency
| Tax year | Basis Period | Year | 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
| Tax year | Basis Period | Year | 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
| Tax year | David | Alexis | Johnny Rose | Moira Rose |
|---|---|---|---|---|
| 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
| Tax year | David | Alexis | Johnny Rose | Moira Rose |
|---|---|---|---|---|
| 2013/14 | £11,000 | £5,500 | £5,500 | |
| 2014/15 | £14,000 | £7,000 | £7,000 | |
| 2015/16 | £18,000 | £9,000 | £9,000 |