Partnerships allow flexibility of management and flexibility of profit sharing, with some tax obligations for partners. The partnership itself must submit a tax return every year (SA800), and every partner must declare their share of income separately.
If you’re in a partnership, it is essential to understand how to file partnership tax returns. Even if there’s no tax due at the partnership level, you must report accurately to avoid HMRC enquiries.
What Do You Include in the Partnership Return?
The partnership tax return is made up of details of partnership income, expenditure, gains, and how the profits or losses are shared among partners. You’ll require:
- Records of income and allowable business expenditure
- Capital allowances, if any
- Adjustments for disallowed expenses or claims for the previous year
Each partner’s details and profit shares must be clearly stated. HMRC requires a breakdown of income and how it’s distributed to each individual.
If you’re using accounting software, most now have features to auto-complete these forms. Alternatively, you can complete and file the SA800 online through the Government Gateway.
Filing Deadlines and Individual Responsibilities
File partnership tax return by 31 January, with the tax year ending on 5 April, and ensure paper returns are filed by 31 October.
Each of the partners will also be required to file their own Self Assessment tax return, utilising the amounts allocated to them from the SA800. Double reporting in this manner makes coordination between partners essential.
The responsibility for initiating the filing of the return often falls on one partner, known as the ‘nominated partner,’ though both partners must ensure their portions are accurately declared.
Profit Distribution and Disputes
Profit distribution does not necessarily result in a 50/50 split. Each partner’s share is defined by the partnership agreement, and issues can arise when the agreement lacks clarity or if a partner feels the profit division is inequitable.
For tax purposes, it’s essential that profit shares match what is reported in the SA800. If your agreement includes variable distributions based on performance or capital input, these details must be reflected in the return.
In cases of new or departing partners, apportioning profits by date or contribution becomes more complex. Clear documentation and professional advice can help navigate these scenarios.
Conclusion for Partners
Filing a partnership tax return correctly requires preparation and good communication between partners. Keep comprehensive records, meet deadlines, and make individual and partnership returns align.
Employing a tax adviser can reduce errors and ensure your return is a reflection of your partnership agreement. Whether you’re a seasoned partner or starting a new business relationship, getting a handle on your tax obligations is the way to guarantee things go smoothly and HMRC is kept happy.
Partners: FAQs
1. What happens if a partner fails to file their tax return on time?
If a partner fails to file their individual tax return on time, they may incur penalties from HMRC. These penalties can include a fine for late submission, and interest may also be charged on any outstanding taxes. It’s important for each partner to stay on top of deadlines to avoid unnecessary costs.
2. Is it possible for partners to modify their profit-sharing arrangement mid-year?
Yes, partners can amend their profit-sharing arrangement during the year, but any changes must be documented in writing and reflected in the partnership agreement. This helps maintain the accuracy of tax returns and the proper distribution of profits in accordance with HMRC standards.
3. Do partnership tax returns require the assistance of a tax professional?
While it’s not a legal requirement, hiring a tax professional can be beneficial for ensuring accuracy in your partnership tax return. A tax expert can help clarify complex tax issues, prevent errors, and ensure that the return is filed correctly and on time.
4. How are losses handled in a partnership for tax purposes?
In a partnership, losses are typically passed through to the individual partners based on their share of the profits as outlined in the partnership agreement. These losses can often be used by partners to offset other sources of income on their individual tax returns, reducing overall tax liability.
5. Can partners claim business expenses on their individual tax returns?
Yes, partners can claim business expenses on their individual tax returns. These expenses must be directly related to the business and need to be clearly documented in the partnership tax return. Ensure that both individual and partnership returns are aligned to avoid discrepancies when filing.
