not for profit partnership

not for profit partnership

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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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By petersaxton
02nd Nov 2012 08:48

Taxed on profits

They will be taxed on profits.

Why did they choose a partnership?

 

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By debbie pearce
02nd Nov 2012 08:57

A limited company was not an option for other reasons, they do not meet the definition of a charity.

The business activity can be classified as education in a partnership for VAT purposes!

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By ACDWebb
02nd Nov 2012 09:08

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

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By debbie pearce
02nd Nov 2012 09:23

employed by the partnership

They were hoping to be employed by the partnership with no profit allocation as the agreement states that all profit is reinvested.

Would this tax them under PAYE paying more tax than a self employed partner would be paying?

If they are taxed on profits they cannot be a not for profit organisation which defeats the point of the exercise.

Can anyone point me to some guidance or case law?

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By neileg
02nd Nov 2012 09:34

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.

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By ACDWebb
02nd Nov 2012 09:35

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

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Replying to DJKL:
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By neileg
02nd Nov 2012 09:41

Not quite right

ACDWebb wrote:

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

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).
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David Winch
By David Winch
02nd Nov 2012 10:00

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

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Euan's picture
By Euan MacLennan
02nd Nov 2012 10:16

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.

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By neileg
02nd Nov 2012 10:16

@davidwinch

David, you have stated more clearly what I alluded to in an earlier post. So I agree!

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By debbie pearce
02nd Nov 2012 10:32

VAT

Thanks to you all, this is so helpful.

Basically a body which does not distribute any profit and provides training can be exempt from VAT.

If partners are taxed on partnership profit and cannot reduce profit via a PAYE salary, then surely that is a distribution.

Does the salary count as a profit share? If so they are distributing profits and do not meet the criteria and the idea does not work!

Is that the consensus?

Thanks again

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By ACDWebb
02nd Nov 2012 10:47

@ 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

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By neileg
02nd Nov 2012 13:54

@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.

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By carlreader
06th Nov 2012 11:55

@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!

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By debbie pearce
07th Nov 2012 08:33

private tuition

Unfortunately this is not a subject ordinarily taught in a school or university and nothing to do with sport so I do not believe that the exemption can apply

Thanks though, I did have some hope when I found case law under private tuition but this was before the wording change in 1994

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By Marion Hayes
12th Nov 2012 12:17

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.

 

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Replying to cjtrevor:
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By KH
12th Nov 2012 14:55

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).

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7om
By Tom 7000
12th Nov 2012 12:24

Community interest companies

Try looking into the rules on CICs...that might work

It wont with what you have

 

 

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By edwincrump
12th Nov 2012 18:16

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 

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By debbie pearce
13th Nov 2012 12:34

Unfortunately a limited company is not an option :(

I agree with the VAT mentioned above, a cookery class run by a non-limited entity is exempt from VAT (not exempt if limited), however this is not a cookery class or something usually taught in schools, nor is it sporting more is the pity!

This is why I was looking at alternative structures.

The client is actually happy to pay more tax under PAYE if it avoids VAT registration as they feel that their custom will be lost with a VAT price hike.

I am interested in Marion's comments above that partners can be employed and taxed under PAYE if there is no entitlement to assets on winding up and no profit share is available to the partners, but this is not a charity, they clearly charge for services with no community benefit.

The comments before this all agreed that where a partner is paid, even if it is called salary, it would be treated as partners drawings and taxed as self employment income.

 

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By neileg
13th Nov 2012 12:50

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.

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By jndavs
14th Nov 2012 15:52

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?

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Replying to lionofludesch:
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By neileg
15th Nov 2012 12:39

Partners

jndavs wrote:

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.

 

jndavs wrote:

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?

It's not possible because then it isn't a partnership.
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By jndavs
15th Nov 2012 16:05

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.

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By neileg
16th Nov 2012 12:56

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.

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By petersaxton
16th Nov 2012 13:12
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By jndavs
16th Nov 2012 13:57

Wife?

But she will still take you to the cleaners if you split up!

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