First partnership return

[Kitty Kat]

So 2 clients commenced trading in partnership 1/1/10, period end 31/03/11.

Partners are taxed on 01/01/10 - 05/04/10 and then 01/04/10 - 31/03/11, but when is the first p'ship return due? I am suddenly realising I have never done a first year p'ship return that didn't run to the end of March! I want to submit one return in 10/11 for the period to 31/3/11 with estimates on the partner's returns (already done), but I can't find anything conclusive to confirm that!

[PracticalTax]

I started looking at a similar question recently. I think the conclusion was that you should file a partnership return for 2010/11 showing just the bank interest received in that period, and zeros for trading income. Then the 2011/12 return will show the entire 15 months trading profits, because the accounting period ends in that year, and the 12 months bank interest.

As you state the partners will have two periods, calculated on a time basis, so you will need to estimate the 2010/11 income and correct it when the final profits are known.

The only place I could find any help on this was the guidance to the partnership (SA850, page 4).

[Kitty Kat]

While I am not doubting PracticalTax's advice above, this issue has come again for another client and a quick look over the net has left me baffled, as some say a partnership return is needed with profits apportioned, some a return with no figures on, and some with no return at all.

Could this be re-opened for discussion?

[pawncob]

The "debate" continues. This is a link to a discussion I picked up on Yahoo.

http://www.taxationweb.co.uk/forum/post133622.html?sid=f7548dc4a2acfb1899ca0ab360ab96b7#p133622

Partnership Return Guide (Page 7) says you must use "provisional figures" if you don't have actual figures. Most of the time provisionals would only be required where the A/P hasn't ended, rather than that final accounts haven't been prepared, so I'd guess that HMRC expect you to submit a return to 05/04/10.

[pawncob]

HMRC expect a return:
http://www.hmrc.gov.uk/manuals/sammanual/SAM121190.htm

[towat]

I concur with pawncob, it is slowly coming back to me through the mists of time, I remember there were a lot of these type of anomalies during the Self Assessment transitional year 1996/97?

Provisional figures is definitely the way to go, don't ask me about POA's though my head might explode.

[PracticalTax]

I've looked into this a little further as another case came up, and I've been debating it with another adviser.

We are both agreed that a tax return is required for the opening year, even if an accounting period doesn't end in that year. Where there is uncertainty is what figures one uses. I had previously suggested that the opening year simply showed zeros for the trade, and the bank interest figures.

However, the guidance in SA850 (page PTRG 10) says if you don't have accounts ending in the tax year you should enter details of the partnership's income in the period of the tax year (so in your case 1/1/10 to 5/4/10 on the 2009/10 tax return). This would imply an apportionment of the long period of account.

I think this is the right way to go. But in year 2, following the guidance in SA850, you would put the figures for the accounting period ended in the year (i.e. the long period of account to 31 March 2011 in your case). This means you are effectively doubling the reported figures.

I suggested that if we go down that route we need to put a note in the return saying that we've double-reported some income, in accordance with the guidance at PTRG 4 and 10. The other advisers think that the returns should follow the basis periods for the partners in the opening years - i.e. in your case you would put 1/1/10 to 5/4/10 on the 2009/10 tax return and 01/04/10 to 31/03/11 on the 2010/11 tax return (creating 4 days of overlap). This follows the rules in s196 et seq of ITTOIA.

This treatment does seem to conflict with the guidance issued by HMRC. However, if you look at s12AA of TMA this says that the partners must deliver a tax return establishing the amount each partner is chargeable to income tax for the tax year. So this would suggest that the partnership return must follow the partners' basis periods as set out above.

[Incredulum]

It's a long time since I've done anything on this (it will have been in an exam) and I suppose it may have changed, so take the following with a large pinch of salt.

But IIRC in year two you take the full amount of the profits for the long period and tax them in their entirety - not withstanding that some of these profits have already been taxed in year one. The profits on which there has been double taxation are therefore "overlap profits" which are available for relief in the final year of trading.

http://businesslink.gov.uk/bdotg/action/detail?itemId=1086707705&type=RESOURCES

That is why, clever as it may seem to have an accounting date that is just after 5 April, as it defers paying tax, it doesn't work if you make profits in your first accounting year... as you end up being taxed twice. (Of course if your profits are likely to grow considerably over the following years then there may be a benefit.)

[PracticalTax]

The question is about whether a tax return is required for the partnership. The overlap profit issue is one for the individual partners, not for the partnership.

[Incredulum]

The individual partner is instructed to copy the figures from the partnership tax return onto his own tax return.

Therefore, if the individual partner is required to report overlap profits, surely the partnership tax return has to as well in order that he has numbers to copy across onto his own return?