BIM72335 - Partnerships: Computation & assessment: Previous Year Basis of Assessment

For the years prior to the introduction of the Current Year Basis of Assessment - see BIM72201 - partnership Case I/II Schedule D profits are taxed by making an assessment on the partnership (old ICTA88/S111). The last tax year for which a composite partnership assessment can be made is 1996/97.

The income tax due under Case I/II is computed and stated jointly in one sum. The partners are jointly liable for the tax due on that assessment.

An outline of the rules that applied before the introduction of the current year basis of assessment as they apply to partnerships is set out below. If you require advice on any aspect not covered by this guidance please contact Business Tax (Technical).

ALLOCATION OF PROFITS

In the partnership assessment profits are allocated between the partners in accordance with the partnership’s profit sharing arrangements for the relevant tax year rather than those in the period of accounts which form the basis period for that year (old ICTA88/S277 (2)).

As with the Current Year Basis of Assessment an allocation must not create or increase a loss in the hands of one or more partners - see BIM72245.

CHANGES IN MEMBERSHIP

Where

• a partnership is formed to succeed to a sole trader
• a partnership is dissolved leaving a sole trader to carry on the business, or
• there is a change in the membership of a partnership

the profits or losses of the business are computed as if one business had been permanently discontinued at the date of change and a new business set up and commenced (old ICTA88/S113 (1)).

But if in the above circumstances there is

• at least one person engaged in carrying on the business both immediately before and immediately after the change, and
• all the individuals engaged in carrying on the business both immediately before and immediately after the change so elect

the business is not deemed to have been discontinued and the profits are computed instead on the normal basis appropriate to a continuing business.

The election must be in writing, be signed by all the relevant partners and be sent to the Inspector within two years of the end of the tax year in which the partnership change for which the election is being made occurs.

The instructions relating to the admittance of late partnership elections and the late withdrawal of such elections are to be found in old prints of the Inspectors Manual. If these are not available in the District a copy can be obtained from Business Tax (Technical).

BASIS PERIODS

The basis period rules for partnership assessments follow those for individuals - see BIM71030 for the years up to an including 1995/96 and BIM71035 for the transitional year 1996/97.

The exception to this is where

• there is a change in membership of the partnership after 19 March 1985, and
• the business was carried on in partnership both before and after that change, and
• an election for the continuation basis of assessment under old ICTA88/S113 (2) could have been made but was not made.

In these circumstances the basis periods for the tax year in which the relevant partnership change occurs and for the following three years is the tax year itself, i.e. profits for those tax years are to be assessed on the actual profits arising in those years.

Assuming that there is no change of accounting date and the business continues the basis period for the fifth and subsequent years is the 12 months to the accounting date ending in the previous tax year. But taxpayers may elect within 6 year of the end of the sixth year of assessment for the basis periods for the fifth and sixth years of assessments to be the tax year itself.

CONSEQUENCES WHERE NO CONTINUATION ELECTION MADE

Computation of Profits

The profits are computed as if the business carried on after the change was a new and separate business from that carried on before the change. ICTA88/S89 (debts proving to be bad), ICTA88/S100 (valuation of trading stock), ICTA88/S101 (valuation of professional work in progress); and ICTA88/S103 - S110 (post cessation receipts etc) may apply.

Relief for Losses

• A continuing partner may claim relief for their share of the losses sustained before the change against their share of the profits arising after the change (old ICTA88/S385 (5)).
• A retiring partner may claim terminal loss relief (old ICTA88/S388 and old ICTA88/S389).
• A retiring partner cannot claim loss relief against their total income of the following year (old ICTA88/S380 (2)).

Farmers

A fresh herd basis election is required.

The profits for the year of assessment in which the change takes place cannot be included in a claim for averaging.

CONSEQUENCES WHERECONTINUATION ELECTION MADE

Computation of Profits

The profits are computed as if the business carried on after the change was the same business as that carried on before the change. Where an employee becomes a partner and the continuation basis applies the employee’s remuneration in the basis period should not be added back in the Case I/II computation.

The profits of the year of change must be charged in separate assessments on those who carried on the business before the change and those who carried on the business after the change (old ICTA88/S113 (3)(a).

Where a change in membership is followed by a cessation or deemed cessation in the following two tax years the necessary amendments to the antepenultimate and penultimate years should be made notwithstanding the earlier change (old ICTA88/S113 (3)(b)).

Relief for Losses

• A continuing partner may claim relief for their share of the losses sustained before the change against their share of the profits arising after the change (old ICTA88/S385 (5)).
• A retiring partner is not entitled to terminal loss relief (old ICTA88/S388 and old ICTA88/S389.

Farmers

A fresh herd basis election is required.

The profits for the year of assessment in which the partnership change took place may be included in a claim for the averaging of profits (see BIM73101 onwards)