Tax stuff... partnerships..
Discussion
I'm doing my self assessment. Everything is as it normally is except that now; my new accountant has raised a question I am unsure how to deal with.
In November 2012, my partner and I set up an online shop selling niche items. For the report on the remainder of that financial year, we didn't mark down any earnings from it as it did not turn a profit due to our initial stock buying etc.
However, it is now very healthy and turns a good profit. For the year between April 2013 and '14; we drew an amount each; each month, by standing order - from the business (partnership) bank account to our own personal accounts. We were going to just declare those drawings into our accounts; in our respective self assessment submission. However, the accountant is saying we need a 'partnership tax reference' number and that we cannot submit without that number. Is this right? As usual, there's so many ins and outs with all of this that it's easy to miss a step.
Fast forward to this year, the informal arrangement we both had has been made formal as it is now a LTD company with a new LTD bank account. But from April 2013 to April 2014; it remained an informal arrangement. Both my partner and I are registered for SA but it seems that: we had to declare that we have a project that we do together; is this correct?
In November 2012, my partner and I set up an online shop selling niche items. For the report on the remainder of that financial year, we didn't mark down any earnings from it as it did not turn a profit due to our initial stock buying etc.
However, it is now very healthy and turns a good profit. For the year between April 2013 and '14; we drew an amount each; each month, by standing order - from the business (partnership) bank account to our own personal accounts. We were going to just declare those drawings into our accounts; in our respective self assessment submission. However, the accountant is saying we need a 'partnership tax reference' number and that we cannot submit without that number. Is this right? As usual, there's so many ins and outs with all of this that it's easy to miss a step.
Fast forward to this year, the informal arrangement we both had has been made formal as it is now a LTD company with a new LTD bank account. But from April 2013 to April 2014; it remained an informal arrangement. Both my partner and I are registered for SA but it seems that: we had to declare that we have a project that we do together; is this correct?
A business partnership is sort of a half way house between a sole trader (an individual trading on their own) and a limited company. Unlike a limited company, it isn't a separate legal entity in itself, but HMRC still requires that the partnership registers for Self Assessment in its own right.
As your accountant has said, this means that the partnership must obtain its own separate Partnership Unique Tax Reference (UTR) and the partnership must submit its own Partnership Self Assessment tax return.
Partners in a partnership pay tax on their share of the partnership profits (see below), not on what the individual partners draw out(i.e. drawings) from the partnership.
So, the steps SHOULD have been as follows
i) trading partnership is set up with yourself and your wife as the two partners
ii) HMRC is notified within three months of the partnership starting to trade - this is so HMRC can issue the partnership UTR and get the partnership set up for Self Assessment.
iii) Partnerships are supposed to prepare formal trading accounts (like any business) which should include a profit and loss account and a balance sheet. The partnership should decide very early on the date to which it intends to complete its annual accounts. For smaller partnerships it is usual to select the calender month end nearest the end of the tax year i.e. 31 March
iv) a partnership should also decide early on what the profit sharing ratio (PSR) is going to be between the partners. In a simple two person/husband -wife partnership this would usually be set at 50:50 - but it doesn't have to be.
So, if the partnership was set up on (say) 1 June 2013, then its first set of trading accounts will cover from 1 June 2013 to 31 March 2014.
The first partnership Self Assessment tax return that needs to be completed would be for tax year 2013/14.
Once all the above has been sorted, the partnership prepares the accounts and completes the partnership tax return.
The partnership itself is not liable for and does not have to pay any Income Tax in its own right. Instead, the profits of the partnership are split using the PSR and allocated to the partners and they will pay tax (and possibly Class 4 NI as well) on their share of the partnership profits.
The individual partners will fill the supplementary Partnership Pages of their own personal Self Assessment tax return in which they will enter their share of the partnership profit.
As you can see from the example I am showing above, for tax year 2013/14 there would be three tax returns required to be submitted - one for the partnership and one for each of the two partners.
That equates to a potential £300 penalty for failure to submit the three tax returns by the filing date 31 January 2015.
As your accountant has said, this means that the partnership must obtain its own separate Partnership Unique Tax Reference (UTR) and the partnership must submit its own Partnership Self Assessment tax return.
Partners in a partnership pay tax on their share of the partnership profits (see below), not on what the individual partners draw out(i.e. drawings) from the partnership.
So, the steps SHOULD have been as follows
i) trading partnership is set up with yourself and your wife as the two partners
ii) HMRC is notified within three months of the partnership starting to trade - this is so HMRC can issue the partnership UTR and get the partnership set up for Self Assessment.
iii) Partnerships are supposed to prepare formal trading accounts (like any business) which should include a profit and loss account and a balance sheet. The partnership should decide very early on the date to which it intends to complete its annual accounts. For smaller partnerships it is usual to select the calender month end nearest the end of the tax year i.e. 31 March
iv) a partnership should also decide early on what the profit sharing ratio (PSR) is going to be between the partners. In a simple two person/husband -wife partnership this would usually be set at 50:50 - but it doesn't have to be.
So, if the partnership was set up on (say) 1 June 2013, then its first set of trading accounts will cover from 1 June 2013 to 31 March 2014.
The first partnership Self Assessment tax return that needs to be completed would be for tax year 2013/14.
Once all the above has been sorted, the partnership prepares the accounts and completes the partnership tax return.
The partnership itself is not liable for and does not have to pay any Income Tax in its own right. Instead, the profits of the partnership are split using the PSR and allocated to the partners and they will pay tax (and possibly Class 4 NI as well) on their share of the partnership profits.
The individual partners will fill the supplementary Partnership Pages of their own personal Self Assessment tax return in which they will enter their share of the partnership profit.
As you can see from the example I am showing above, for tax year 2013/14 there would be three tax returns required to be submitted - one for the partnership and one for each of the two partners.
That equates to a potential £300 penalty for failure to submit the three tax returns by the filing date 31 January 2015.
Ouch.
Depressing... so there's not even a way we can both do our standard SA stuff without waiting on the partnership 'code' to come back??
Why is so much assumed; i.e: the knowledge of the average joe with regard this stuff; we had an accountant on board the whole way along and nothing was mentioned about all of this...
Edit to add: Thank you for the detailed response; it's really appreciated
at least now I know our new accountant isn't blowing hot air.
Depressing... so there's not even a way we can both do our standard SA stuff without waiting on the partnership 'code' to come back??
Why is so much assumed; i.e: the knowledge of the average joe with regard this stuff; we had an accountant on board the whole way along and nothing was mentioned about all of this...
Edit to add: Thank you for the detailed response; it's really appreciated
at least now I know our new accountant isn't blowing hot air.Edited by LDN on Saturday 24th January 22:34
It might work.
HMRC expects the partnership UTR to be quoted in the Partnership pages of the Personal Self Assessment tax returns - but you might be able to submit the personal tax return with the partnership UTR missing.
You should still get the partnership sorted properly though.
Your accountant should have guided you on this from the establishment of the partnership.
HMRC expects the partnership UTR to be quoted in the Partnership pages of the Personal Self Assessment tax returns - but you might be able to submit the personal tax return with the partnership UTR missing.
You should still get the partnership sorted properly though.
Your accountant should have guided you on this from the establishment of the partnership.
LDN said:
However, it is now very healthy and turns a good profit. For the year between April 2013 and '14; we drew an amount each; each month, by standing order - from the business (partnership) bank account to our own personal accounts. We were going to just declare those drawings into our accounts; in our respective self assessment submission.
N.B. you are taxable on (and thus need to declare on your SA tax return) your full share of the profits, whether drawn from the partnership account or not.I appreciate you may already be doing this, but just checking as it's not clear from the above.
That's EXACTLY what I said.
Partners pay tax, not on what they draw out of the partnership but on the share of the taxable profits of the partnership. The share of profit is determined by the agreed Partnership Profit Sharing Ratio - which should really be set out in a Partnership Agreement.
Partners pay tax, not on what they draw out of the partnership but on the share of the taxable profits of the partnership. The share of profit is determined by the agreed Partnership Profit Sharing Ratio - which should really be set out in a Partnership Agreement.
Eric Mc said:
That's EXACTLY what I said.
Partners pay tax, not on what they draw out of the partnership but on the share of the taxable profits of the partnership. The share of profit is determined by the agreed Partnership Profit Sharing Ratio - which should really be set out in a Partnership Agreement.
Apologies Eric, I read your post on my phone and somehow skipped through the paragraph where you said that!Partners pay tax, not on what they draw out of the partnership but on the share of the taxable profits of the partnership. The share of profit is determined by the agreed Partnership Profit Sharing Ratio - which should really be set out in a Partnership Agreement.
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