Does profit split for tax have to agree with the written partnership agreeement.

Does profit split for tax have to agree with...

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Can the Revenue disagree with a partnership split of profits by written agreement. Partnership agreement being that the profit split should be in proportion to capital accounts.

Anon

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By Paul Soper
10th Jul 2008 22:27

obtuse?
I think Anon is being deliberately obtuse.

Profits must be divided in accordance with either PA1890 or profit sharing agreement.

If there is a PSR it applies.

The PSR that applies is the PSR for the period for which accounts are drawn up.

You cannot retrospectively change the PSR that applied to an earlier period.

You can agree during the AP that the PSR is the PSR that will be agreed after the end of the AP.

Can you agree during or before the end of the AP to divide profits in the ratio of capital accounts YES YOU CAN - sorry I'm shouting

Can you agree after the end of an AP to share profits in the ration of capital accounts - NOT IF IT IS DIFFERENT FROM THE AGREEMENT DURING THE AP

Can you agree during the AP to share profits in a method that will be determined after the end of the AP - YES YOU CAN!

IS THIS CLEAR?

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By AnonymousUser
09th Jul 2008 16:59

Translation
That refers to Class 2 and 4 NIC liabilities.

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By User deleted
09th Jul 2008 11:01

Well I took a look at the BIM Kevin which continued:-

Whether Profits Earned or Unearned


Every partner is the agent of his fellow-partners for the purpose of the partnership business (Section 5, Partnership Act 1890) so a partner may ‘carry on business’ through their fellow- partners as their agent without playing any active part in the business themselves. Where they do act personally in the business, even to a very limited extent (for example, taking part in major decisions concerning the business) it is likely that their share of profit will be ‘earned income’ as defined by ICTA88/S833 (4)(c). Where they act entirely by way of an agent, so that they do not act personally, their share will normally be unearned income, though it remains trading income.

Can anyone translate?

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By User deleted
30th Jun 2008 11:06

Thanks for your comments....
No Paul nothing more to the question. Thanks for your reply.

Fellowcraft pretty much summed up my question.

Do Paul and Fellowcraft disagree on the profit being split in proportion to Capital Account balances at the year end date as a method of profit split?

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By thehaggis
25th Jun 2008 23:08

Agreement
Partnership profits are shared in accordance with the partners wishes . Their wishes may change at any time, and need not reflect the proportion of capital (or indeed work done). The proviso is that changes cannot be retropective. The difficulty with your situation may be that the capital accounts are regularly drawn down, effectivley changing the profit share many times during the year. If you are trying to share the profits in accordance with the closing balances, it may well be said that this is a retrospective change.

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By Paul Soper
27th Jun 2008 14:26

A certain lack of understanding...
Maybe it's because most senior revenue officers have opted for early retirement etc - but it is very clear from the controversial income splitting proposals that HMRC do not understand what a partnership is in law - and perhaps some accountants do not appreciate some of their subtleties.

Legally reference should be made to the Partnership Act 1890, a consolidating statute bringing together principles derived from earlier commercial cases. However this only applies to partnerships in England and Wales - Scottish partnerships are very very different in law and none of the comments below will apply to these partnerships.

In law, but not in Scotland, a partnership is not a seperate legal entity, and in the absence of a partnership agreement profits and losses MUST be shared equally, with no allowance for partnership salaries or interest on capital. Garner v Murray only applies to division on breakup of the partnership where capital is being returned.

However where there is a partnership profit sharing agreement it supercedes the division in the act and although it cannot be changed retrospectively (Ayrshire Pullman Motor Services v Ritchie) it can be determined flexibly - the division in the agreement is to determine the profit share by agreement after the end of the period in question. The revenue themselves accept that this can solve the problem of determining compensation for expenses incurred by partners individually as relief can only be given through the partnership's own return.

Beware the settlement legislation as the Arctic Systems case (Jones v Garnett) indicated that there could be an element of bounty in certain partnership agreements but... what possible objection can HMRC have to a division on the basis of capital account balances given the Arctic would indicate that that would most definitely NOT be a settlement!

Is there more to this than meets the eye?

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By neileg
26th Jun 2008 11:46

Iestyn
I understand where you're coming from. I too have worked in a small provincial practice and have seen lots of partnerships as you describe.

The trouble is that your observation that a partnership is somehow radically different from a company doesn't stand scrutiny very well. I know the legal differences, but set those to one side for a moment. Two people working together in a business can come to a profit sharing arrangement that reflects their inputs to the business. These inputs may be time, money, expertise, etc. How does that change if they choose to operate as a partnership or a company? I would argue that it doesn't. Where these are family businesses, then who gets paid what depends on Dad (or Mum) and it still doesn't matter if the business is incorporated or not.

Which is a long way of restating that using capital invested as a basis of sharing profits is just as legitimate for a partnership as for a company. It may not be the norm and it may be reminiscent of byegone days, but bizarre it isn't.

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By User deleted
25th Jun 2008 22:09

To Anon
I think you may actually mean that proportion of capital that each partner injected into the business at the commencement rather than the capital accounts.

Capital accounts change year on year dependant on how much of the appropriated profit is taken out, therefore it wouldn't be any kind of basis to appropriate future profits on.

In your instance, did one partner initially contribute more into the business and is claiming a higher % of the annual profits? Are you concerned that HMRC may deem this to be unrealistic and attempt to tax the other partner?

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By User deleted
25th Jun 2008 17:38

garner V Murray
many many years ago when accountants and tax inspectors were friendly neighbours it was common for inspectors to quote this case when arguing about profit sharing.

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By neileg
25th Jun 2008 16:39

Puzzled
to insist that profits are shared in the ratio of the capital account balances is frankly bizarre
I don't follow. This is almost identical to the situation with a company, where entitlement to dividends (and retained profits) is in proportion to shareholdings.

I have come across this before, albeit with a prior salary arrangement (like a director's salary in a company!).

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By User deleted
25th Jun 2008 15:28

garner and murray
Has this been superseded ?

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