CTM36510 - Particular topics: companies in partnership: computation of profits and losses

ICTA88/S114 sets out the rules by which partnership profits are to be calculated, allocated and assessed when at least one member of a partnership is a company. There are three steps to follow:

• First, you calculate the profits or losses of the partnership’s trade, profession or business (see CTM36560) for its accounting period as though the partnership was a company. Charges on income (e.g. annual payments, etc), capital allowances, balancing charges and losses incurred in any other period are left out of account. For this purpose the CT rule prohibiting the deduction of a distribution ( CTM02050) in computing income does not apply. Therefore a distribution which, apart from this prohibition, would be allowable on ordinary income tax principles, may be deducted.
• Second, you determine, according to its interest in the partnership in that accounting period, the company's share of the partnership’s profit or loss arrived at above, and any matter excluded from that profit or loss, e.g. charges on income.
• Third, you assess and charge the company to CT under ICTA88/S8 (2) as if its profit share derived from a trade, profession or business it carried on alone. The trade, profession or business carried on in partnership is a separate trade, etc. from any other trade, etc. that the company carries on alone.

Where the partnership’s accounts are made up to a different date from the company's accounting date, you should apportion the company’s share of the partnership profits to its own accounting periods. Normally you do this on a time apportionment basis under ICTA88/S72. Apportionment may not however be ‘necessary’ where a more accurate measure of the profits for any accounting period can be found - see Marshall Hus & Partners v Bolton 55TC539.

The statutory rules in ICTA88/S114 for computing the amount of each company partner’s share of the partnership’s profits originally applied only to partnerships that carried on a trade. The statutory rules were extended to partnerships carrying on a profession or an investment business (see CTM36560) with effect:

• from 1994-95, where the business was set up and commenced on or after 6 April 1994, and
• from 1997-98, where the business was set up or commenced before 6 April 1994.

You should also use this three-step approach for members of a partnership, which carry on a profession or a business not amounting to a trade, to calculate their tax liability for accounting periods ending before those dates.

If there are individuals or trustees in the partnership you should refer to BIM72200 onwards for detailed instructions regarding the computation of their tax liability.

The CT, which is charged on a company partner in respect of its share of partnership profits, is not a partnership debt. None of the other partners are therefore liable for that tax.