PTP Tax Tip No 25 - Post cessation tax hit for accountant

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Q. I retired from my firm on 31 December 2004 and agreed with my erstwhile partners the basis on which I could withdraw my current and capital account from the firm. I have filed my 2005 tax return covering the tax year 2004-05. I am now completing my 2006 tax return and am concerned because I saw something in the professional press the other day that indicated that I may have to disclose some further income because of UITF 40. Surely this cannot be right since I stopped being a partner before UITF 40 was introduced.

A. Your old firm will have to adopt UITF 40 for the year to 31 December 2005 and the resultant prior period adjustment will be brought in as 'adjustment income' for 2005-06. It is taxable under Chap 17 Part 2 ITTOIA 2005 (and although it is not subject to Class 4 national i...

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08th Aug 2006 15:44

Surely there must be another way?
A profit share is not always a fixed percentage. This is probably better explained by an example:
The background is as already detailed, other than assume three partners at 31.12.04.
Profits at 31.12.04 are £50,000.
Partner A (retiring) has a share of £25,000
Partner B and C take £12,500 each.
In ratio terms A=50%; B and C=25%.
Owing to UITF 40 there is an uplift in wip at 31.12.04 of £10,000, so now the adjusted profits are £60,000. Partner A had left the partnership on 31.12.04 and he agreed that his share would be the £25,000. Therefore the additional £10,000 would be split between partners B and C in equal proportion. The new share is now: Partner A £25,000, partners B and C £17,500 each (A=41.6667%; B and C =29.1667 each). This would be equitable because although partners B and C will pay tax on the £10,000 and payments spread over 3 to 6 years they are also the ones that get an additional tax deduction in the year ended 31.12.05, owing to the increase of opening w.i.p. of £10,000.

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09th Aug 2006 13:10

Not an ideal world
I agree entirely with Mark's point - it is open to partners to agree how to share profits from time to time. (I would advise partner A to get written confirmation from B and C that they are self-assessing the whole adjustment between themselves.)
The problem for some retiring partners will be that in the absence of any such agreement with his partners the preceding year division basis for the adjustment could be applied to his detriment.
In practice there will be a number of such retirements where the split is acrimonious and no such agreement is forthcoming.

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