# ESM3204 - How to work out the profits of the intermediary: partnership example - accounts made up to a date other than 5 April

## Paragraph 18(2) Schedule 12 Finance Act 2000

This illustrates the case of an on-going business where:

• accounts are made up to date other than 5 April; and
• all income is derived from relevant engagements

Mr and Mrs B carry on business in partnership and make up their accounts to 30 September each year. They split profits equally but Mr B performs the services. Relief for the deemed payment is given in the accounting period in which it arises.

Partnership accounts show the following figures:

 Year ended 30.9.2001 30.9.2002 Income 25,000 30,000 Expenses 5,000 6,000 Profit 20,000 24,000 Mr B 10,000 12,000 Mrs B 10,000 12,000

Calculation of deemed payment

 Year ended 5.4.2001 5.4.2002 5.4.2003 Step One Income 27,500 33,000 40,000 Deduct Step One 5% flat rate allowance 1,375 1,650 2,000 Step Three Employment Income expenses 3,000 4,000 5,000 4,375 5,650 7,000 Net 23,125 27,350 33,000 Step Eight Secondary Class 1 NICs 2,038 2,498 3,112 Step Nine Deemed payment 21,087 24,852 29,888

Recalculation of partnership’s taxable profit

Revised profit year ended 30.9.2001

 Partnership profit 20,000 Add Disallowed expenses* 625 Total 20,625 Deduct Secondary Class 1 NICs on deemed Payment Deemed Payment 2,038 21,087 Total deductions 23,125 20,625+ Taxable Trading Income profit 0

* The disallowed expenses are based on the excess of the Trading Income expenses over the sum of the Employment Income expenses and 5% allowance (5,000 - (3,000+1,375)).

+The sum of the deemed payment and secondary Class 1 NICs (21,087+2,038=23,125) is greater than the adjusted Trading Income profit (20,625). Therefore, the deduction is limited to the amount that reduces the taxable profit to nil.

Revised profit year ended 30.9.2002

 Partnership profit 24,000 Add Disallowed expenses* 350 Total 24,350 Deduct Secondary Class 1 NICs on deemed Payment Deemed payment 2,498 24,852 Total deductions 27,350 24,350+ Taxable Trading Income profit 0

* The disallowed expenses are based on the excess of the Trading Income expenses over the sum of the Employment Income expenses and 5% allowance (6,000 - (4,000+1,650)).

+The sum of the deemed payment and secondary Class 1 NICs is greater than the adjusted Trading Income profit so the deduction is limited to the amount that reduces the taxable profit to nil (paragraph 18(2) Schedule 12 Finance Act 2000).

Overall tax position 2001/02

 Mr B Mrs B Trading Income 0 0 Employment Income 24,852 0

Overall tax position 2002/03

 Mr B Mrs B Trading Income 0 0 Employment Income 29,888 0