My client X ran her own business Y as a sole trader until 30/11/14. Then her daughter Z joined her as a partner on 01/12/14. The accounts are drawn up to 05/04/15.
The partners are connected and as such my understanding is that the business should be treated as continuing, rather than being viewed as ceasing and a new business starting. See link below.
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim82225
I prepared a set of accounts A from 06/04/14 to 30/11/14 for the sole trading and then a separate set of accounts B from 01/12/14 to 05/04/15 for the partership.
I allocated all of the profit from accounts A to partner X, then split the profit from B evenly between partners X & Z.
Example: Loss from Sole Trading accounts A = £1166, Profit from Partnership accounts B = £5951
Allocated as follows:
Year Ended 05/04/15 X Y Total
06/04/14 - 30/11/14 (1) -1166.00 -1166.00
01/12/14 - 05/04/15 (1:1) 2975.50 2975.50 5951.00
Totals 1809.50 2975.50 4785.00
Should I instead have prepared just one set of accounts from 06/04/14 to 05/04/15, worked out the profit for the entire year, and then allocated the profits according to the partners profit sharing ratios as below?
Example: Profit for the year 06/04/14 to 05/04/15 = £4,785
Allocated as follows:
Year Ended 05/04/15 X Y Total
06/04/14 - 30/11/14 (1) 4785 x 239/365 days 3133.19 3133.19
01/12/14 - 05/04/15 (1:1) 4785 x 126/365 days 825.90 825.90 1651.81
Totals 3959.10 825.90 4785.00
This is in fact how my AAT textbook allocates things with the partnership profits calculated for the whole period and then allocated on a pro rata apportionment according to the partnership profit ratios.
The reason I raise this question is that the example in this BIM manual is confusing. Partnerships - computation and assessment: examples of partnership computations
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim82330
In the example of Bailey, Wainwright and Hatch, where the third partner joined part way through the accounts period, accounts were drawn up first to the day before he joined, and then to the end of the normal accounts period.
Sadly the example uses the same profit per month namely £2000 for both the period until the third partner joins and the remainder of the accounts year, which makes it difficult to determine for sure whether the profits have been calculated up to 05/04 completely separately from the remainder of the year, or whether they have been calculated on the year as a whole and then apportioned.
The example seems to indicate that accounts should be drawn up to just before the partner joins , profits allocated to the existing partners, and a separate set of accounts for the remainder of the period which is then allocated again.
The other reason I ask is that this has huge implications for claiming capital allowances. In the accounts to 30/11/14 there are £16000 worth of capital allowances on machinery that could be claimed (but I don’t want to claim yet as it would be a waste of my clients tax allowance with their current profits).
If 2 sets of accounts have been drawn up to both 30/11/14 and then 05/04/15 then do all of these capital allowances belong to partner Y?
However If accounts are drawn up to 05/04/15 only then can both Y & Z can claim them?
Again the partners are connected and as such my understanding is that the business should be treated as continuing, rather than being viewed as ceasing and a new business starting - https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim82225
Therefore I don't anticipate any cessation rules regarding capital allowances or having to transfer them from the sole trader to the partnership.
Replies (3)
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You seem to be forgetting that these are just numbers on a page to you but real money to the partners. So you need to speak to them about which of the different ways of allocating the profit provides the result they want.
But if you have already prepared two sets of accounts I am not sure why you are think of aggregating them. What would be the point?
It was a sole trade prior to the daughter joining. You seem to be forgetting that. Sole loss then 50/50 split using the accounts you have. Stop over complication it.