I have a client partnership which commenced trading on 1 April '12 and it's first accounts were prepared to 30 Nov '12 (an 8 month period). There are two partners. Owing to an arrangement agreed between the partners one partner did not become eligible (and did not start receiving) any profits until April '13.
When the second year's accounts for the y/e 30 Nov '13 are produced will the partner who did have any profits until April '13 (therefore in the 13/14 tax year) still be taxable on 4/12ths of the profits of the second set of accounts in 12/13 even though he did not receive any profits in that year?
Comments and advice would be appreciated.
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Replies (4)
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Doesn't sound like there was much of a partnership until after 5 April 2013, but let's leave that aside.
Assuming what you have is a partnership that commenced on 1 April 2012 and will prepare its accounts to 30 November each year, in 2013/2014 the partner you are asking about will pay tax on 50% x 8/12 of the profit in the November 2013 accounts and 50% x 4/12 of the profit in the November 2014 accounts.
That presumably will exactly mirror the profit sharing arrangements in the accounts.
The above pre-supposes that the partners will agree that the profits in the 2013 accounts accrue evenly over the period. If they decide to apportion the profits in some other way the allocation for tax purposes will just follow.
UPDATE (EDIT)
Apologies - the basis of assessment in 2013/2014 will in fact be the November 2013 accounts profit - not the actual basis that I incorrectly assumed above. So the November 2013 accounts will give the partner you are asking about (if partners agree time-apportionment) 50% of 8/12 of the profit, and the same allocation will apply for tax purposes.
Thanks for your reply. Just to ensure I understand does that mean that the first partner (the one who had all of the profit for the 8 months to 30/11/12) will be taxable for 12/13 on the 8 mths profit only or that plus 4/12ths of the profit for the year ended 30/11/13?
Actual basis
Thanks for your reply. Just to ensure I understand does that mean that the first partner (the one who had all of the profit for the 8 months to 30/11/12) will be taxable for 12/13 on the 8 mths profit only or that plus 4/12ths of the profit for the year ended 30/11/13?
Well I think the basis of assessment in 2012/2013 must be the actual basis mustn't it, as there's no 12 month accounting period ending in the year? So yes he'll pay tax on a full 12 months worth of profit.
Not necessarily
Time apportionment is not necessary - see http://www.hmrc.gov.uk/manuals/bimmanual/bim71065.htm
Although time apportionment is the usual and accepted method, it is certainly possible not to use it if an accurate apportionment can be made and in the past I have always made a full white space note to show what I have done - this has not to date been challenged.
I would add that, depending on profit levels, it may be beneficial to apportion the 4 months to 2012/13 as this would spread 8 months of profit over 12 months - this would depend on income levels/tax rates and would speed up the payment of some of the tax liabilities.