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12 November 2019
Issue: 4720 / Categories: Forum & Feedback
Accounting for profits on overseas partnership

I act for two UK resident individuals who are members of an overseas partnership. None of the partnership’s activities are carried out in the UK, the business accounts are prepared overseas and I am simply advised of my clients’ share of profits.

Not all jurisdictions calculate taxable profits on the same basis, so does that mean that I have to review the accounts for any expenditure that would be disallowable in the UK? Or do I just report the share of profits that is provided by the partnership?

I look forward to readers’ replies.

Query 19,456 – Reporter.

Reply by  Traveller

More information is needed about the exact nature of the partnership

This is one of those cases where I would want to find out a lot more before giving advice. First, I would want to know more about the partnership itself. For UK tax purposes, partnerships are transparent – partners being taxed on their share of profit. But some non-UK partnerships are treated as opaque – the profits are taxed at the partnership level and individual partners are then taxed on what they receive rather than on their share of profits. HMRC’s Partnership Manual at PM288000 sets out the tests that are applied.

But is this indeed a partnership? Often, the word ‘partnership’ can be used in a non-technical sense by individuals to mean many different things. For example, it could simply be a joint investment vehicle rather than something actually carrying on a business in the sense that we would understand for UK partnerships.

Further, if it is a partnership it seems odd to have UK resident individual partners for a business carried on wholly outside the UK. This is not impossible, but seems unusual unless this is purely an investment vehicle.

I think that Reporter needs to be very careful here and must ensure that they understand exactly the nature of this partnership. If satisfied that all that is required is to enter the share of profits on the individuals’ tax returns then the task will be fairly straightforward. But if required to prepare UK adjusted profit figures for the partnership, they could have to deal with some very complex issues. In such a case it is important to ensure that these are within their professional indemnity insurance cover. Reporter would also need to agree a proper fee basis with his clients before proceeding with any substantive work in this area.

Reply by Rossini

The normal rules for assessing partnerships apply

There are no special provisions governing this particular situation and, consequently, the normal rules for assessing partnerships will apply. Reporter says that none of the partnership’s activities are carried out in the UK. If they are satisfied on that point, this will mean that the non-UK partners have no UK tax liability.

In its Partnership Manual at PM284000, HMRC sets out instructions to its officers as to what test to apply if a UK resident partner claims that all the profits of the partnership are earned outside the UK.

The UK partners will be subject to tax on their share of the worldwide profits and those shares must be based on those profits as adjusted for UK tax purposes.

ITTOIA 2005, s 849(2) states: ‘For any period of account in which the partner is a UK resident individual, the profits or losses of the trade are calculated as if the firm were a UK resident individual.’

At 16.41 of Ray’s Partnership Taxation it is suggested that if the profits of the partnership are not drawn up in accordance with UK GAAP it might be possible to reach agreement with HMRC on an informal basis as to how the UK profits are to be determined. There does not appear to be any formal HMRC statement on this subject, but it does seem a sensible way to approach matters.

Much will depend on the amounts involved. If Reporter’s clients are receiving sums in the low thousands as partnership shares a pragmatic approach may well be to return the actual sums received and make a white space note explaining what has been done. However, for more substantial sums it would be better to seek agreement in advance from HMRC on the appropriate treatment if that can be done.

Finally, Reporter should not overlook the possibility that partnership profits may have been taxed in the country of origin and hence that a measure of double taxation relief will be available against the UK liability.

Issue: 4720 / Categories: Forum & Feedback
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