An LLP client has a salaried partner, who meets the three 2014 tests so their income is dealt with via PAYE, and is part of the P & L salary deduction.
They are also entitled to a 5% profit share after prior profit allocations have been dealt with, established in the usual way once the partnership business tax computation has been dealt. This must be paid to the salaried partner via PAYE as soon as possible (within nine months of the year end). They also highlight that the salaried partner doesn't appear on the partnership return.
So how do you deal with the 5% on the partnership return, or rather, how can I allocate only 95%, while treating it as 100% of the taxable profits? The accounts were signed off and submitted to CH ages ago, so don't want to be changiong those, but TBH, I don't see how this could be an accounts adjustment, as the 5% couldn't be quantified at that time.
I could alter an entry in the P & L (salaries and wages maybe?) to reduce my net taxable profit but if I alter what is an accounts figure, then my balance sheet will not balance, so I'd need to altyer other figures. Either way, the figures on the partnership tax return would no longer match those in the accounts.
I could reduce an addback, to ultimately reduce the net taxable profit while not impacting on the 'net profit per the accounts' figure, but what happens if I don't have sufficient add backs to cover the 5%?
I could just reallocate the 5% between the other partners, but that would mean they pay tax on income which a) they are not entitled to and b) will be taxed via PAYE, so would mean taxing the 5% twice?
A variation on this, which is the one I'm favouring at the moment, is to introduce the 5% into box 3.82 - Adjustment on change of basis on the partnership return. I don't think this is strictly correct (the HMRC notes talk about using it when there has been a change from self employment and partnership activity), but at least i don't need to make changes to the P & L or addback figures?
This is the first year this has happened, but I also would like to be clear on how this is dealt with in the following year i.e. in the accounting period when the 5% is paid to the salaried partner.
All of the HMRC and other online/telephone guidance I've found doesn't cover this side of it, simply suggesting that the business is entitled to a deduction for the amount paid to the salaried partner (unless it wouldn't otherwise be allowable). I've got a call into HMRC to speak to the equivalent of an accounts inspector (I hope...) to get their thoughts.
Anyone dealt with this sort of thing before or knows how to?
Replies (18)
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If the profit before the 5% "bonus" is, say, £100,000 and the 5% bonus is £5,000, the profit to be allocated between the real partners is £95,000 IMO.
The fact that that isn't the figure per the accounts is inconvenient, but I think that issue needs to be dealt with in some way other than that which you propose.
Personally, I'd either use the "adjusted" accounts profit as a starting place, or have a negative add-back for salaries.
Imho, the problem is the accounts, not the return.
This 5% share should have been accrued against profits. In reality, it's wages. Unless I've misread your explanation.
I wouldn't use box 3.82. It's asking for an HMRC enquiry.
I think you are overthinking. For a salaried partner the condition of payment within 9 months means it is a valid tax comp adjustment. You include the bonus + employers nic in employment costs on the return as if they were in the accounts. White space notes can be made.This reduces the profits to allocate between the remaining partners.
You then use a prior year adjustment in the next years accounts, reducing the capital accounts by the previous years under deduction.
I'll be interested to hear what the HMRC person suggests.
It won't be useful. He won't know the answer.
May be a very silly question, but is the 5% profit share calculated using the accounts figures after salaries for partners(through PAYE) or is it 5% of the adjusted taxable profits after salaries?
The reason I ask is that I have never actually seen the latter except re profit sharing partners included within the SA return and if the former then in future years the tax comp would not be required pre finishing the accounts.
"So how do you deal with the 5% on the partnership return, or rather, how can I allocate only 95%, while treating it as 100% of the taxable profits? The accounts were signed off and submitted to CH ages ago, so don't want to be changiong those, but TBH, I don't see how this could be an accounts adjustment, as the 5% couldn't be quantified at that time. "
There are a number of points here with which I profoundly disagree. This has the stench of "I didn't understand what I was doing".
Of course this is an accounting adjustment. It does not matter that it was not quantified at the balance sheet date. The process is to prepare the accounts in draft, quantify the 5% and stick a journal in, leaving the 95% to be divided by the proper partners in their profit sharing ratio.
It's not dissimilar to something we all do on a regular basis - provide for a company's Corfporation Tax liability. We work out thed profit, turn our attention to the tax comp and then return to the accounts with a journal for the tax liability.
There are two options.
a. Amend the accounts.
b. Run with the accounts as submitted.
What isn't an option is to make an adjustment for what is, in effect, an omitted accrual on the face of the tax return.
By making the adjustment in the Tax Return though you will have to remember to make a compensating adjustment next year when the 5% is actually paid out! The accrual method is the most correct.
Well that was a turn up for HMRC. Good clean advice and a pragmatic way of dealing with the problem. That having said if accounts to show the 5% as a share of profit (but taxed under PAYE) this would be the correct accounting procedure. Just because the tax law wants something different means that the white space or a pdf will make sure the correct amount of tax and NIC is paid.
Surley you should just put the details of the 5% share to the "Salaried Partner" on the Partnership tax return as part of the allocation of profits between partners. (pages 6 & 7)
EG Partner 1 £50,000
Partner 2 £45,000
Salaried Partner £5,000
Total profit £100,000
The salary element is already within the accounts (Wages). The Salaried Partner then has a SA liability and pays the tax accordingly.
Surley you should just put the details of the 5% share to the "Salaried Partner" on the Partnership tax return as part of the allocation of profits between partners. (pages 6 & 7)
EG Partner 1 £50,000
Partner 2 £45,000
Salaried Partner £5,000
Total profit £100,000
The salary element is already within the accounts (Wages). The Salaried Partner then has a SA liability and pays the tax accordingly.
A salaried partner isn't a partner. He's an employee.
They're just calling him a partner to give him status in the firm in the eyes of outsiders.
Doesn't make a lot of difference for tax (timing differences mostly) but it does for NIC.