A newly formed partnership intends to reinvest all surpluses made so there will be no profit share.
The partners will take a fixed salary taxed under PAYE and will not receive any other benefits of ownership.
This is not a charity but a service provider charging fees for its services which is its only source of income.
Can anyone let me know the tax implications of this? Is the surplus taxable?
Thanks loads
Replies (27)
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They will be taxed on profit share
The fixed profit share is not taxable under PAYE, though they might wish to use that as a basis for setting aside tax at least in part
Two points and further consideration
A partnership is formed by a group of individuals acting together. The partnership is not a fully separate legal entity (different in Scotland) so there can't be a contract of service between the partnership and the partners. No contract, no PAYE.
The concept of 'not for profit' is not one that UK tax law recognises. Just because a trading venture decides not to distribute profits does not make the profits non-taxable. There needs to be a defined reason for non-taxable status, e.g. a registered charity.
You may not want to use a limited company but perhaps an LLP or an Industrial and Provident Society might suit your purposes better.
What they take as fixed salary
is drawings from the partnership, so not allowable for tax and would have to be added back in arriving at taxable profit.
You might have no accounting profit after drawings, but will have a taxable profit
Not quite right
A partner's salary is a prior allocation of profits, not drawings. The effect of salaries is to share profits differently from a straight profit share and a partner is taxed on their salary plus their share of residual profits (or losses if the salaries exceed the available profit).is drawings from the partnership, so not allowable for tax and would have to be added back in arriving at taxable profit.
You might have no accounting profit after drawings, but will have a taxable profit
Reinvested surplus
Surely for tax purposes a surplus which is reinvested in a partnership is taxable in exactly the same way as a surplus which is drawn out by the partners. So, in tax terms, this is not a 'not for profit' partnership, it is a 'for profit' partnership with lower than usual drawings.
David
Not for profit
I agree with Neil that there is no such thing as a "not for profit" company or partnership for tax purposes. Either it qualifies as tax exempt under other rules for charities, etc., or it pays tax on whatever profit it makes.
What puzzles me is why a service provider needs to reinvest surpluses. Why not just charge a lower fee for the service? The partners will remain liable personally to income tax on their shares of the profit.
@davidwinch
David, you have stated more clearly what I alluded to in an earlier post. So I agree!
@ neileg
yes sorry wrong term, a prior share.
What I was trying to get across (badly) was the fact that the "salary" is not a deduction for tax, which is presumably how the OP was going to show it in the accounts in part to arrive at no profit.
"Salary" in connection with partners is a misnomer. It does not mean that it is taxed under PAYE, but is merely a method of arriving at profit share - ie one might have partners who receive a base share (salary) with the remainder being allocated in agreed proportions, but that is all profit share
@debbie
The term distribution is not relevant to a partnership. Profits belong to the partners whether they are drawn or undrawn. Undistributed profits in a company belong to the company, not the shareholders but this situation isn't a company.
ACDWebb and I have explained that a partner's salary is an allocation of profit and this is true whether it is taken in cash or left in the partner's current account.
It's clear to me that a partnership is not the right business structure for the wishes of the business owners. You need to look at alternative legal structures.
@debbie
Sounds like you should take some advice on this - the educational exemption is available for 'eligible bodies' which are precluded from distributing profits - ordinarily structured as companies limited by guarantee.
Partnerships tend to be used for the private tuition exemption, which is another option.
Be careful though - my team seem to spend half their life tidying up the mistakes other accountants make in respect of these structures!
Partnerships and salaried partners
Whilst I agree with most of the comments there is a difference between equity partners and salaried partners.
If the partners you are talking about are full equity partners they have rights to assets in a winding up of the partnership and are taxable on profits arising - irrespective of whether any amounts are drawn.
If the partners have no rights to equity, but are just entitled to a salary, then this is payable under PAYE and is a deduction for tax purposes, but the tax burden including NIC is higher on these individuals and the partnerships.
As there cannot be a partnership without at least two equity partners I cannot see at the moment how this can be a useful structure, unless the actual partners can be different entities and the partnership structured in such a way as to achieve charitable status, maybe by having 2 limited by guarantee companies set up by the individuals?
On the VAT front I was advised by a VAT Inspector, checking if one of my clients should have been VAT registered, that if the supply qualified as education it did not count within the turnover test. My client was a small sole trader giving cookery demonstrations and lessons. If he was correct the structure should not affect the exemption.
Educational courses, and legal structure
On the VAT front I was advised by a VAT Inspector ... that, if the supply qualified as education, it did not count within the turnover test. My client was a small sole trader giving cookery demonstrations and lessons. If he was correct the structure should not affect the exemption. (Marion Hayes)
I don't think this is strictly true ... if you are a sole trader running B2C (biz to consumer) courses, then your courses are VAT exempt and not counted in towards the VAT registration threshold, BUT, if you are a LtdCo running B2C courses, you might easily get caught by VAT unless your company is a registered educational establishment. Different rules on B2B courses (biz to biz).
Community interest companies
Try looking into the rules on CICs...that might work
It wont with what you have
not for profit partnership
A partnership will not do as one of the definitions is relationship etc etc with a view to profit. A limited company can be regarded as non-profitmaking if the Mem/Articles forbid dividends and any surplus on winding up is donated to a similar educational body
Semantics
Calling someone a 'salaried partner' coupled with no participation in capital is just a title. They aren't partners for any tax or legal purposes.
They aren't partners for any tax or legal purposes.
Really?
I thought that their decisions are binding on the partnership just like equity partners.
Taxed salaries are normally charged against profits and the residue distributed to the profit sharing partners.
If the partnership agreement forbids a profit share, who owns this residue?
Partners
Really?
I thought that their decisions are binding on the partnership just like equity partners.
Only if the true partners have agreed to be bound. There would need to be an agreement to that effect since there's no statutory power to do so.
It's not possible because then it isn't a partnership.Taxed salaries are normally charged against profits and the residue distributed to the profit sharing partners.
If the partnership agreement forbids a profit share, who owns this residue?
Partners
I disagree, Jo Public is not party to a partnerships agreement.
If a person is called a partner, allbeit salaried, behaves as a partner and the 'real' partners allow this to carry on irrespective of any internal agreement. That person's decisions will be binding on the partnership. This is known as agency by estoppel or the doctrine of holding out.
Everything is subject to the partnership agreement of course but on the face of it the equity/salaried status simply governs how the partner is remunerated.
My second point was rhetorical and aimed at the OP.
I'm afraid I disagree too, jndavs
I'm aware of agency by estoppel and holding out. I also know the duck test (if it looks like a duck, walks like a duck and quacks like a duck, then it's a duck).
However that doesn't make a salaried partner a partner. Unless they share in the assets and liabilities on the winding up they aren’t partners. The fact that the public or other businesses regard them as partners and indeed have a right in some cases against the firm for the actions of salaried partners doesn’t change this. People could regard the woman that I share my life with, who has taken my surname and who wears a wedding ring as my wife. If we aren’t married then she isn’t my wife.
Sorry for not spotting your retorical reply to the other point.