IR35: Computation - Question 8

Mr and Mrs B work as members of a partnership, of which they are the two partners. They each carry out relevant engagements during the year. 50% of the partnership income arises from such engagements and 50% from other sources. Profits are split equally. Each is provided with a car, both of which are held as partnership assets. The private use proportion of the motoring expenses is 30 per cent.
How will their income be affected by the IR35 rules?

Partnership accounts show the following results:

Year ended 5 April 2008  
Income 80,000
Expenses 17,000*
Profit 63,000
Tax adjusted profit 65,000 (reflects adjustments for depreciation, private expenses etc)
   
* includes motoring expenses of 3,000

Notes:

  1. Payments from relevant engagements:
    80,000@ 50% = 40,000
  2. Employment income expenses allowed against deemed payment:
    3,000@ 70%*50% = 1,050

    (this apportionment depends on the facts. In this case relief is available for 50% of the business expenses reflecting the use of the cars in the relevant engagements. A further apportionment has to be made between the expenses relating to each partner. Where a car is concerned this is likely to be based upon mileage. The claim can be based upon the actual expenses incurred and capital allowances or, as an alternative, upon the HMRC Authorised Mileage Rates)

  3. as a partnership, any pension contributions will be paid personally by the individual partners and relieved under the usual rules.

Calculation of deemed payment at 5 April 2008

  Mrs A Mr A
Payments from relevant engagements: 25,000 15,000
Less    
5% allowance 1,250 750
Allowable expenses 700 350
Employer's NICs on deemed payment: 2,023 984
     
Deemed payment: 21,027 12,916
     
Recalculation of partnership taxable profit    
Partnership profit: 65,000  
Plus disallowed expenses:    
(7,500-(2,000+1,050))* 4,450  
  69,450  
less deemed payments 33,943  
less employer's NICs on deemed payment 3,007  
Taxable profit 32,500  
     
Recalculation of personal liability    
  Mrs A Mr A
Partnership profit: 16,250 16,250
Deemed payment 21,027 12,916

* this amount reflects the difference between the expenses incurred in respect of the relevant engagements and the amounts allowed as part of the 5% allowance and employment income expenses.

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