BIM72330 - Partnerships: Computation & assessment: Examples of Partnership Computations



Example 1

Assessment of partnership income: Case I/II income

On 1/7/1998 George Bailey sets up in business on his own, as a travel agent, and produces accounts to 30/6/1999.

On 1/7/1999 Bailey enters into partnership with Sam Wainwright, the business continues unchanged.

A third partner, Mary Hatch, joins the partnership on 6/4/2000. Accounts are made up to 5/4/2000, 30/6/2000, and 30/6/2001.

Wainwright leaves the partnership on 30/6/2001, to set up a new business on his own.

At first Bailey and Hatch continue in partnership, with the business unchanged. But on 30/6/2003 the existing partnership business is sold.

Bailey and Hatch commence a new business, of painting and decorating, on 1/7/2003 and accounts are made up to 5/4 each year thereafter.

In both businesses income is shared equally throughout.

Step 1

Partnership income is computed using normal Case I/II rules, as for individuals (ICTA88/S111 (2)).

Assume the income for each accounting period is as follows

Travel Agency

12 months to 30/6/1999£15,000
9 months to 5/4/2000£18,000
3 months to 30/6/2000£6,000
12 months to 30/6/2001£28,000
12 months to 30/6/2002£34,000
12 months to 30/6/2003£24,000

Painting and Decorating

9 months to 5/4/2004£22,000
12 months to 5/4/2005£28,000
12 months to 5/4/2006£36,000

Step 2

Partnership income is then shared out amongst the partners (ICTA88/S111 (3)).

Travel Agency



BaileyWainwrightHatch
12 months to 30/6/1999£15,000 (100%)



9 months to 5/4/2000£9,000 (50%)£9,000 (50%)

3 months to 30/6/2000£2,000 (33.3%)£2,000 (33.3%)£2,000 (33.3%)
12 months to 30/6/2001£9,333 (33.3%)£9,333 (33.3%)£9,333 (33.3%)
12 months to 30/6/2002£17,000 (50%)

£17,000 (50%)
12 months to 30/6/2003£12,000 (50%)

£12,000 (50%)

Painting and Decorating



Bailey (50%)Hatch (50%)
9 months to 5/4/2004£11,000£11,000
12 months to 5/4/2005£14,000£14,000
12 months to 5/4/2006£18,000£18,000

Step 3

Basis periods are determined for each partner, as if that partner were in business on their own (ICTA88/S111 (4)).

In this example the changes in ownership of the travel agency business at 1/7/1999, 6/4/2000, and 30/6/2001 are only partial changes in ownership and you do not apply ICTA88/S113 (1). Instead you apply the continuation basis (ICTA88/S113 (2)) to those changes.

The change in ownership at 30/6/2003 is a complete change in ownership and you apply ICTA88/S113 (1) to that change.

The painting and decorating business is a new source of Case I income. Therefore you apply the commencement basis.

Basis periods for Bailey

Travel Agency



Basis Period

Statute
1998/999 months 1/7/98 to 5/4/99Year 1ICTA88/S61 (1): Actual basis for year of commencement
1999/0012 months 1/7/ 98 to 30/6/99Year 2ICTA88/S60 (3)(a): 12 months to accounting date
2000/0112 months to 30/6/00Year 3ICTA88/S60 (3)(b): 12 months following previous basis period.
Continuation basis applies to partnership formed on 1/7/99 (ICTA88/S113 (2)).
The deemed business now carried on by Bailey is deemed to have commenced when the actual business was first set up (ICTA88/S111 (4)(b)). So for Bailey this is still ‘Year 3’.
Although accounts were made up to 5/4/2000 and 30/6/2000, there was no intention to change accounting date. The basis periods continue to be set by reference to 30/6.
2001/0212 months to 30/6/01Year 4ICTA88/S60 (3)(b): 12 months following previous basis period
2002/0312 months to 30/6/02Year 5ICTA88/S60 (3)(b): 12 months following previous basis period. Continuation basis applies to partnership formed on 1/7/01 (ICTA88/S113 (2)).
2003/0412 months to 30/6/03Year 6ICTA88/S63: period between end of previous basis period and date of cessation. Complete change in ownership of business at 30/6/03, therefore ICTA88/S113 (1) applies.

Painting and Decorating



Basis Period

Statute
2003/049 months 1/7/03 to 5/4/04Year 1ICTA88/S61 (1): Actual basis for year of commencement. This is a new Case I source. Therefore commencement basis applies.
2004/0512 months to 5/4/05Year 2ICTA88/S60 (3)(a): 12 months to accounting date
2005/0612 months to 5/4/06Year 3ICTA88/S60 (3)(b): 12 months following previous basis period

Basis periods for Wainwright

Travel Agency



Basis Period

Statute
1999/009 months 1/7/99 to 5/4/2000Year 1ICTA88/S61 (1): Actual basis for year of commencement. ICTA88/S111 (4)(b) deems Wainwright's notional business to commence when he first became a partner in the actual business.
2000/0112 months to 30/6/2000Year 2ICTA88/S60 (3)(a): 12 months to accounting date
2001/0212 months 1/7/00 to 30/6/01Year 3ICTA88/S63: period between end of previous basis period and date of cessation. ICTA88/S111 (3)(e) deems Wainwright's notional business to cease when he ceases to be a partner in the (continuing) actual business.

Basis periods for Hatch

Travel Agency



Basis Period

Statute
2000/0112 months 6/4/00 to 5/4/01Year 1ICTA88/S61 (1): Actual basis to 5/4/01 for year of commencement
2001/0212 months to 30/6/01Year 2ICTA88/S60 (3)(a): 12 months to accounting date
2002/0312 months to 30/6/02Year 3ICTA88/S60 (3)(b): 12 months following previous basis period
2003/0412 months to 30/6/03Year 4ICTA88/S63: period between end of previous basis period and date of cessation

Painting and Decorating



Basis Period

Statute
2003/049 months 1/7/03 to 5/4/04Year 1ICTA88/S61 (1): Actual basis for year of commencement
2004/0512 months to 5/4/05Year 2ICTA88/S60 (3)(a): 12 months to accounting date
2005/0612 months to 5/4/06Year 3ICTA88/S60 (3)(b): 12 months following previous basis period

Step 4

Compute assessable income for each tax year.

Travel Agency



BaileyWainwrightHatch
1998/999/12 x £15,000 = £11250



1999/0012/12 x £15,000 = £15,000 (overlap profit £11,250)9/9 x £9,000 = £9,000

2000/01(£9,000 + £2,000) = £11,000(£9,000 + £2,000) = £11,000 (overlap profit 9,000)(£2,000 + 9/12 x 9,333) = £9,000
2001/02£9,333£9,333 less overlap relief £9,000 = £333£9,333 (overlap profit £7,000)
2002/03£17,000

£17,000
2003/04£12,000 less overlap relief £11,250 = £750

£12,000 less overlap relief £7,000 = £5,000

Painting and Decorating



BaileyWainwrightHatch
2003/04£11,000

£11,000
2004/05£14,000

£14,000
2005/06£18,000

£18,000

Example 2

Assessment of partnership income: non-Case I/II income

The facts are the same as in example 1.

If those partnerships have additional non-Case I/II income that is untaxed income (say Case III) then wherever possible you asses that income using the Case I/II basis periods identified in example 1.

If those partnerships have taxed income that is not derived from a Case I/II source (say dividend income) then you assess that income on a tax year (6 April to 5 April) basis.

Assessment of Untaxed income

Step 1

You compute the Case III income using normal Case III rules, as for individuals (ICTA88/S111 (2)).

Assume the untaxed interest arising to each business is as follows

Travel Agency

12 months to 30/6/1999£2,000*
9 months to 5/4/2000£2,200
3 months to 30/6/2000£400
12 months to 30/6/2001£3,600
12 months to 30/6/2002£4,000
12 months to 30/6/2003£3,400

*Bailey was a sole trader during this period.

Painting and Decorating

9 months to 5/4/2004£150
12 months to 5/4/2005£200
12 months to 5/4/2006£210

Step 2

The income is then shared out amongst the partners (ICTA88/S111 (3)).

Travel Agency



BaileyWainwrightHatch
12 months to 30/6/1999£2,000 (100%)



9 months to 5/4/2000£1,100 (50%)£1,100 (50%)

3 months to 30/6/2000£133 (33.3%)£133 (33.3%)£134 (33.3%)
12 months to 30/6/2001£1,200 (33.3%)£1,200 (33.3%)£1,200 (33.3%)
12 months to 30/6/2002£2,000 (50%)

£2,000 (50%)
12 months to 30/6/2003£1,700 (50%)

£1,700 (50%)

Painting and Decorating



BaileyHatch
9 months to 5/4/2004£75 (50%)£75 (50%)
12 months to 5/4/2005£100 (50%)£100 (50%)
12 months to 5/4/2006£105 (50%)£105 (50%)

Step 3

The basis periods for each partner are the Case I/II basis periods (as in the example 8 at BIM71115) except that for the first 12 months Bailey carried on the business as a sole trader. Therefore for the period up to 1/7/99 whilst Bailey was a sole trader

  • You assess any untaxed income arising in this period on a tax year (6 April to 5 April) basis, not on an accounts basis
  • You deem the notional trade used to determine the basis periods for Bailey's share of untaxed income to commence on 1/7/1999
Step 4

The income is assessable as follows

Travel Agency



BaileyWainwrightHatch
1998/999/12 x £2,000 = £1,500no partnershipno partnership
1999/00 (to 30/6)3/12 x £2,000 = £500no partnershipno partnership
1999/00 (from 1/7)9/9 x £1,100 = £1,1009/9 x £1,100 = £1,100not yet a partner
2000/01(£1,100 + £133) = £1,233 (overlap profit £1,100)(£1,100 + £133) = £1,233 (overlap profit £1,100)(£134 + 9/12 x £1,200) = £1034
2001/02£1,200£1,200 less overlap relief £1,100 = £100£1,200 (overlap profit £900)
2002/03£2,000no longer a partner£2,000
2003/04£1,700 less overlap relief £1,100 = £600no longer a partner£1,700 less overlap relief £900 = £800

Painting and Decorating



BaileyHatch
2003/04£75£75
2004/05£100£100
2005/06£105£105

Assessment of Taxed income

Step 1

You compute the gross dividend income as for individuals (ICTA88/S111 (2)).

Assume the income for each accounting period is as follows

Travel Agency

12 months to 30/6/1999£4,000*
9 months to 5/4/2000£1,200
3 months to 30/6/2000£900
12 months to 30/6/2001£7,200
12 months to 30/6/2002£9,000
12 months to 30/6/2003£11,400

*Bailey was a sole trader during this period

Painting and Decorating

9 months to 5/4/2004£150
12 months to 5/4/2005£200
12 months to 5/4/2006£250

Step 2

You then share out the partnership income out amongst the partners (ICTA88/S111 (3)).

Travel Agency



BaileyWainwrightHatch
12 months to 30/6/1999£4,000 (100%)not yet a partnernot yet a partner
9 months to 5/4/2000£600 (50%)£600 (50%)not yet a partner
3 months to 30/6/2000£300 (33.3%)£300 (33.3%)£300 (33.3%)
12 months to 30/6/2001£2,400 (33.3%)£2,400 (33.3%)£2,400 (33.3%)
12 months to 30/6/2002£4,500 (50%)no longer a partner£4,500 (50%)
12 months to 30/6/2003£5,700 (50%)no longer a partner£5,700 (50%)

Painting and Decorating



BaileyHatch
9 months to 5/4/2004£75 (50%)£75 (50%)
12 months to 5/4/2005£100 (50%)£100 (50%)
12 months to 5/4/2006£125 (50%)£125 (50%)

Step 3

You do not assess the taxed income on an accounts basis, but on a tax year basis instead. You must apportion any such income accordingly.

Step 4

Compute assessable income for each tax year

Travel Agency



BaileyWainwrightHatch
1998/999/12 x £4,000 = £3,000not yet a partnernot yet a partner
1999/00 (to 30/6)3/12 x £4,000 = £1,000not yet a partnernot yet a partner
1999/00 (from 1/7)9/9 x £600 = £6009/9 x £600 = £600not yet a partner
2000/013/3 x £300 + 9/12 x £2,400 = £2,1003/3 x £300 + 9/12x £2,400 = £2,1003/3 x £300 + 9/12 x £2,400 = £2,100
2001/023/12 x £2,400+ 9/12 x £4,500 = £3,9753/12 x £2,400 = £6003/12 x £2,400 + 9/12 x £4,500 = £3,975
2002/033/12 x £4,500+ 9/12 x £5,700 = £5,400No longer a partner3/12 x £4,500 + 9/12 x £5,700 = £5,400
2003/043/12 x £5,700 = £1,425no longer a partner3/12 x £5,700 = £1,425

Painting and Decorating



BaileyHatch
2003/04£75£75
2004/05£100£100
2005/06£125£125

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