Replies to Queries - Somewhat interesting

Somewhat interesting

I act for Mr A and Mr B who are partners in a professional firm. However, I do not act for the partnership itself. I recently filed — before the 31 January deadline date — my clients' 2003-04 self assessment tax returns. I had reproduced on the partnership pages of their personal tax returns the information which appears on the partnership statement pages of the partnership tax return.
The partnership has traded for many years and makes up its accounts to 30 April each year. The entries on the partnership statement pages of the partnership return for 2003-04 derive from the accounting period 1 May 2002 to 30 April 2003. Those pages show a new source of income, being untaxed UK savings. Upon further enquiry, I found that the source came into existence in June 2002.
Should I have made an entry in box 4.29 (adjustment to income) of my clients' 2002-03 returns? If so, what course of action do readers recommend?
Also, should I establish how much interest was earned in the accounting period of twelve months to 30 April 2004 and include a proportion of that interest in box 4.29 of my clients' 2003-04 returns?
Readers' advice and comments on these points would be most welcome.
(Query T16,573) — Interested.

The technical answer is simple and is contained in TA 1988, ss 111(8)(a) and 111(8)(c), which relate specifically to trading and professional partnerships. Untaxed income, such as interest, is computed in the same way as the related Schedule D, Case I/II, i.e. using the same basis periods as the partnership, but as a separate 'notional' or 'deemed' trade. The date that any untaxed source (in this case interest) commences or ceases does not come into play. An untaxed interest source does not have its own commencement or cessation rules (it uses the partnership's own Case I/II dates), and the taxable interest follows directly from the figures from the accounts.
In this case, the new interest as per the accounts to 30 April 2003 (being from June 2002 to 30 April 2003) should be included on the 2004 partnership tax return and is allocated in the profit-sharing ratios of the partners who participated in the accounting period ended 30 April 2003. Those 'shares' are directly 'transcribed' to box 4.28 on the partnership (full) page of the relevant partner's personal 2004 tax return (from the 'partnership savings, investments and other income' pages via the partnership tax return box 13). As the partnership was already ongoing, the date the account opened is irrelevant.
This is as opposed to the position for taxed interest. In that case, the taxed income, if shown in the accounts, would be deducted in the Case I/II tax computation, and replaced, in the 2004 partnership tax return, by the actual income received, and tax deducted, in the tax year ended 5 April 2004. This is then divided between the partners participating in the tax year ended 5 April 2004 and transferred to their own 2004 tax returns. (CGT is also reported for the whole tax year to 5 April — TMA 1970, s 12AA(7).)
There are two 'practical' rules of thumb which all practitioners should heed.

• The practitioner acting for the partnership should always know who is acting for each partner. Whilst it is simpler if it is the same agent, where it is not, the partnership accountant should send to other agent an extract copy of the partnership tax return, page 7, annotated as need be (to explain capital gains disposal amounts, etc.) once the partnership tax return has been signed off. This is not only common courtesy to a fellow professional, but also ensures that the nominated partner meets his obligation to tell his partners about the figures for their returns.
• The practitioner acting for a partner should never enter figures in pages P1 to P4 of that partner's corresponding return unless they come from the extract mentioned above. In the real world, where partnership returns are delayed, the partner's agent should, in the absence of the extract, contact the partnership agent for the details. (This applies in all cases except where the partner is either new or ceasing, where an adjustment — to get the correct basis period for the Case I/II figure on commencement of his 'deemed trade', or to apply overlap relief on his cessation — is required, in addition to the above information.)

If Interested had followed the above, he would not have contemplated any 'adjustments' with regard to untaxed interest. However, there must be many a practitioner who has cursed when having been assured that a disposal happened (or new 'taxed interest bearing' business bank account started) after 5 April of the tax year concerned, subsequently finds that the gain or change of account, happened before 5 April. Therefore, the previous return(s) are potentially wrong, need to be 'repaired', and could provoke an enquiry.

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