A and B are individuals trading in partnership. Under the terms of the partnership, agreement profits are shared 50:50 whereas losses are to be shared A:80 and B:20.
For the accounting period ended 31 December 2001, there is an accounting profit but for tax purposes after capital allowances this becomes a loss.
Readers are requested to advise as to how the loss should be apportioned between the partners in the partnership self-assessment return.
(Query T15,991) - Pip.
A and B are individuals trading in partnership. Under the terms of the partnership, agreement profits are shared 50:50 whereas losses are to be shared A:80 and B:20.
For the accounting period ended 31 December 2001, there is an accounting profit but for tax purposes after capital allowances this becomes a loss.
Readers are requested to advise as to how the loss should be apportioned between the partners in the partnership self-assessment return.
(Query T15,991) - Pip.
Under section 111(2)(a), Taxes Act 1988 profits and losses arising from a trade or profession carried on in partnership are computed for income tax purposes as if the partnership were an individual.
For individuals, capital allowances are treated as trading expenses and are therefore deducted in arriving at the figure for adjusted trading profits (section 247, Capital Allowances Act 2001). It is this adjusted profit figure which is then allocated between the partners in accordance with the profit/loss sharing ratio in force.
In this case the trading result to be apportioned is a loss which should therefore be apportioned on the basis A80:B20 in accordance with the partnership agreement in force. - Woman of Milton Keynes.
Section 19, Partnership Act 1890 reads 'The mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be varied by the consent of all the partners, and such consent may be either expressed or inferred from a course of dealing'.
This means that profits and losses do not have to be shared in the same ratio.
Under self-assessment rules, capital allowances are treated as a trading expense (section 247(a), Capital Allowances Act 2001), and therefore for tax purposes in respect of the year ended 31 December 2001, or more precisely the 2001-02 tax year, there is no partnership profit.
Therefore boxes 12 on pages 6 and 7 of the partnership tax return for the year ended 5 April 2002 should show A being allocated 80 per cent of the loss, with the remaining 20 per cent being allocated to B. - N.K.
A partnership agreement operates in the real world and relates to profits as computed under normal accounting principles. This is a matter of general partnership law. The loss in question is a tax loss not an accounting loss, and therefore should be shown presumably 50:50 in the partnership self-assessment return. The situation would only be different if the partnership agreement specifically covered the apportionment of tax losses or the situation where a real profit, as here, has been turned into a tax loss. That is most unlikely. - Robin Hood.
Editorial note. 'Robin Hood' represents a minority view, but it should be noted that he is with a legal firm. Possibly the partnership agreement needs to be rewritten to cover instances such as described by 'Pip'. If the partners do not agree with the majority view, surely they can vary the agreement on a one-off basis?
The problem is much wider than may be apparent from the query. All sorts of adjustments have to be made to accounting profits in order to establish profits for tax purposes and these can easily convert profits into loss or losses into profit. Alternatively profits themselves may be divided differently according to the level reached. In the querist's case, is there any chance that the accountants could see their way to fixing depreciation for the year at the same level as the capital allowances claim?
