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Although a partnership agreement does not have to be in writing, it is always a good idea to outline the exact terms in a document. In doing this each partner's rights and liabilities are clear. Provisions should also be made in the original agreement for changing and dissolving the partnership, which is important for taxation purposes.
Partners are treated as self employed by HM Revenue and Customs (HMRC) for taxation purposes. For more information, see our ‘Taxation’ section covering sole traders.
The partnership itself has to fill in a Partnership Tax Return, which must be filled in to show the partnership's income and expenses for the tax year. This includes a Partnership Statement, which shows how profits or losses have been divided among the partners.
The partnership should appoint one of its officers - the nominated officer - to fill in the Partnership Tax Return and send it to HMRC. They should also ensure that all other officers are given copies of the Partnership Statement to help them complete their own personal tax returns.
Although the nominated officer has responsibility for the Partnership Tax Return, all the partners will be jointly liable for any penalties resulting from it being submitted late or incorrectly.
When a new person joins an existing partnership, they will be assessed on income tax for their first year on the basis of profits made during that tax year, i.e. from the date of their joining the partnership to the following 5th April.
In the second tax year in which the trade is carried on, income tax will generally be assessed on the basis of the normal rule, i.e. on the profits of the twelve month accounting period that ends in the second tax year.
For more information, see our ‘Income tax’ page concerning sole traders.
Capital gains tax arises when there is a disposal of a chargeable capital asset, e.g. premises, fixed plant and machinery, goodwill, etc. that result in a chargeable gain. Listed below are the steps to follow when calculating the amount of capital gains tax:
The first step is to divide the capital gains among the partners according to the profits sharing ratio found in the partnership agreement. If there is no profit sharing ratio, the capital gains must be shared equally. The reason behind such division is that where a partnership firm disposes of a chargeable asset, this is treated as being separate disposals by the partners of their individual interests in that asset.
For more information, see our ‘Capital Gains Tax’ section concerning sole traders.
