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Partnership Drawings

Should the drawings figure on the accounts match the actual drawings?

A father and son partnership want to allocate more profit to the father than the son, as this is beneficial for tax purposes due to other income the son has.  They want to split it 80/20 to father and son.  However the son draws much more money out of the business than the father, in reality probably about 20/80 in favour of the son, and hence his capital account would soon become overdrawn if the actual drawings were recorded. 

If however the drawings were allocated along the lines of the 80/20 profit split so that the accounts looked sensible, would this cause issues if they had a tax investigation as the stated drawings would not match the actual drawings from the bank?  Im assuming the father could say he gifted his money to his son and assuming he lived the relevant amount of time this would be ok for inheritance tax purposes, but I just wondered what people's opinions are on whether HMRC would say it was tax evasion if the drawings on the accounts dont tie in with the actual drawings taken. ?  Obviously I am aware that you are taxed on profits, not drawings, but would HMRC smell a rat if the son allocates profits on the accounts of say £7000 and drawings to match, but in actual fact draws out £28,000?

If so, what other options can people suggest (other than taking drawings by cash) in order to achieve the desired profit split but not limit the son to the drawings he wishes to take?  I dont really want the son's capital account to be massively overdrawn and the father's massively in credit.  Any ideas?

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By DJKL
17th Nov 2017 16:22

I would suggest not a clever idea, there is more than a hint of diverted profits about such arrangements. I have no problem with husband/wife joint capital/drawings, if that is what they want, but here, father and son, any investigation looking at lifestyles etc might encounter some issues.

Do they perhaps pay tax at different marginal rates?

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to DJKL
17th Nov 2017 16:41

Yes, the biggest problem will be in the future as the son has 7 rental properties, ironically 4 of them were given to him from his father in order to save on inheritance tax (not my idea, I can think of better ways they could have done this) which with the new restrictions on mortgage interest will mean he will end up being classed as a higher rate tax payer.

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17th Nov 2017 16:31

Many, many years ago, I had a similar case where HMIT (yes, a long time ago) sought to show that the profits were in reality shared in a different ratio to that declared.

Those were the days when you could chat about it informally and we eventually came to an agreeable compromise.

The point is that the partnership agreement might say one thing and the evidence another.

Make sure the partners know the risks.

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17th Nov 2017 20:54

Partnerships can allocate profits as partners agree, and draw out of the partnership again as they agree.
I would be far more unhappy about manipulating the figures than dealing with reality.
I would show real drawings, but, at the accounts review, agree and document the gift from father to son.
Discuss with them the implications from both an IHT and family perspective each year with a follow up confirmation letter.

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