When to allocate partnership tax after insolvency

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Hi, I'm hoping some of you may be able to help as I have been going round in circles trying to read up on this and am now very confused having never dealt with someone who has been made insolvent before.

My client was made personally insolvent on 24.07.2019 and this was discharged on 24.07.2020. He was part of a partnership which carried on trading. My main questions are:

1. Do I/does he need to apply for a new tax code as from 24.07.2020 (I assume so but can't get hold of the insolvency service to find out if they already have a new code for him)

2. The partnership year end is 30.09 so I'm unclear on how the tax should be allocated - y/e 30.09.18 is obviously under the insolvency order,  but does y/e 30.09.19 get split or does the whole years' profit get allocated to the remaining partner (and the same question regarding 30.09.2020)

Thank you

Replies (13)

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By johngroganjga
02nd Oct 2020 11:31

Questions about how the 2019 profit was allocated is one for the partners, including your client. Frankly I am baffled that he is unaware of the agreed profit sharing arrangement for a year ended over a year ago, and even more so that the partnership accounts for that year have apparently not yet been prepared.

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Replying to johngroganjga:
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By pken04
02nd Oct 2020 19:54

The partnership share has always been 90% to my client, my question was more to do with whether the insolvency changes matters

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Replying to pken04:
By johngroganjga
02nd Oct 2020 22:27

But, as I said, what does your client say was agreed, and, even more so, what do the accounts say about how the profits were shared?

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By Tax Dragon
02nd Oct 2020 22:00

IANAL.

Can an insolvent be a partner?

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Replying to Tax Dragon:
By johngroganjga
04th Oct 2020 09:31

I am not a lawyer either. I see no public policy reason for bankrupts to be prevented from earning an income, but what do I know? But that is not the point.

The point is that this must have been addressed between the bankrupt and his trustee on 24 July 2019, and the bankrupt - the OP’s client - will have been the first to know if any changes were necessary. So the OP should ask his client.

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Replying to johngroganjga:
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By Tax Dragon
04th Oct 2020 12:42

Your point that two people can share a pot of cash between them as they see fit is of course correct - assuming it doesn't belong to someone else. The question is whether the sharing is pre-tax or post-tax.

If the law doesn't recognise a bankrupt person as a partner, I'm thinking, in the scenario described, it's likely post-tax.

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Replying to Tax Dragon:
By johngroganjga
04th Oct 2020 12:51

I have no idea what this has to do with the question the OP asks. But in any case, the concept of a partnership having post tax profits makes no sense. Partnerships have profits, but they don’t pay tax on them. The individual partners pay tax on their shares of the profit. So one can talk about each individual partner’s profit after tax, but not about the partnership having a profit after tax.

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Replying to johngroganjga:
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By Tax Dragon
04th Oct 2020 13:47

But if the law brings the partnership to an end on the bankruptcy of a partner, all your talk of partnership taxation is of no relevance.

IANAL, but if I ask an internet search engine whether a bankrupt person can be a partner, the answer that comes back is: no.

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Replying to Tax Dragon:
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By pken04
04th Oct 2020 14:01

Generally you would be right, but in this case the partnership was allowed to continue by the government insolvency department, because there was no partnership debt, and the other partner was solvent. It was also something to do with the goodwill of the partnership name.

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Replying to pken04:
By johngroganjga
04th Oct 2020 14:03

So if you know that the partnership continued, what is your question?

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Replying to pken04:
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By Tax Dragon
04th Oct 2020 14:44

It was probably worth mentioning that up front. I now agree with John - though, like John, I no longer understand what you were asking.

Whatever, there were doubtless terms on which the partnership was allowed to carry on. Those terms having been applied, the tax follows.

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By Paul Crowley
04th Oct 2020 13:13

On insolvency of a person a new UTR is usually issued for that person

Tax returns are on one or the other. HMRC decide about allocation of liabilities and credits within a single tax year

No idea why tax code is raised as an issue

Partnership income allocation is unchanged, it stays allocated according to the agreement, allocated to the persons entitled

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Replying to Paul Crowley:
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By pken04
04th Oct 2020 14:02

Thank you for your help

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