Partnership Tax Guide

A partnership for tax reasons means sharing responsibility for the running of a business and any profit with at least one other individual or a company.

Choosing a partnership business structure can be beneficial when compared to other options with tax efficiency one of the potential positives.

It’s definitely worth finding out about how a partnership could impact your business especially if you are a sole trader or considering setting up a limited company.

In our partnership tax guide we look at the main types of partnership available and answer important questions around operating your business as a partnership.

What type of Partnerships are there?

There are different partnership types and we cover two of the most popular used by businesses which require a minimum of two partners and have no maximum limit.

They are called an ordinary (or general) partnership and a limited liability partnership or LLP for short.

Ordinary Partnership

The most common type of partnership is an ordinary (or general) partnership which forms a group of two or more individuals mutually running a business.

In the same way as a sole trader an ordinary partnership is not limited which means the partners are personally liable for all business responsibilities.

The partnership is not a separate legal entity with all partners considered personally accountable for the businesses legal matters and debt.

The partners need to choose a nominated partner who becomes responsible for submitting partnership tax returns and keeping the partnerships business records.

A partnership agreement is often created to give each partner clarity around general responsibilities, profit distribution, decision making and what happens if a partner chooses to leave.

Ordinary Partnership strengths and weaknesses

Ordinary partnership strengths:

  • Relatively easy to set up and there is typically less administrative duties.
  • Less expensive accountancy fees with no companies house involvement.
  • Privacy can be maintained because accounts and personal information does not have to be disclosed publicly.
  • Shared responsibility can spread risk and the pressures of running a business.

Ordinary partnership weaknesses:

  • Like a sole trader any business debt becomes the responsibility of the partners. This means that personal assets can be pursued to pay debt relating to the partnership.
  • If one partner is unable to pay their share of any business debt the remaining partners will usually be left to cover all partnership debt and not just their own share.
  • A partnership is not able to access finance as a business because it is not a separate legal entity.
  • Sharing responsibility means you lose complete control increasing the chances of disagreements which can effect your businesses performance and personal relationships.

Limited Liability Partnership

The limited liability partnership or LLP for short is a partnership with a limited company angle giving the partnership it’s own legal status.

Each partner in an LLP normally has limited liability with no personal liability to debts incurred by the partnership.

This in comparison to an ordinary partnership is an advantage because the personal assets of each partner are protected against partnership debt.

Instead of an individual person a LLP can choose to have a separate limited company as a partner.

Profits from the LLP are split between the partners with who have to complete their own self assessment tax return declaring partnership profits.

An LLP must have at least two designated partners who become responsible for commitments like:

  • Keeping compliant accounting records.
  • Companies house duties including sending annual accounts and confirmation statements.
  • VAT registration and VAT return submissions.

It’s commonplace for LLP’s to have an agreement laying down rules around points like profit share, capital contribution, partner responsibilities and what to do if a partner leaves.

LLP strengths and weaknesses

LLP partnership strengths:

  • Limited liability means that the personal assets of partners are not at risk from partnership debt recovery.
  • A company can be a partner and not just an individual person.
  • Access to finance through the LLP.
  • Sharing responsibilities can support growth and reduce some risks.

LLP partnership weaknesses:

  • More administrative obligations for example filing to companies house.
  • Some privacy is lost with accounts and personal information made public by companies house.
  • Sharing responsibilities can mean losing control of decision making which may lead to disputes and complications.
  • A comparative increase in accountancy fees covering the extra filing obligations.

Who can be a partner?

An individual that is a partner will also have to submit their own personal tax return and register to pay national insurance contributions.

This can be a limited company as well as a person.

A limited company as a partner will be obliged to pay corporation tax on their profits and declare it on their self assessment return.

Choose a nominated partner

Once you have chosen your business name, you need to decide on who the ‘nominated partner’ is going to be.

They will become the communications link between HMRC and your business. If you do not choose a nominated partner between yourselves, then HMRC will choose someone for you (a bit like school!).

On any official business paperwork there must be all the partners’ names and the business’s name and not just the nominated partner’s.

This nominated partner must first register the partnership’s existence with HMRC. The deadline for registration is the 5 October of the business’s second year of operating.

There are fines for missing the deadline. They also take on the responsibility of maintaining thorough business records and filing the company’s annual tax return.

How are profits from a Partnership taxed?

Income from an ordinary partnership is shared between the partners of the business with any tax owed on profits payable by each partner personally.

As a partner you need to submit your own personal self assessment tax return which is separate from the partnership tax return.

The partners need to declare partnership income on the their tax return and pay tax on any profits at the appropriate rates of income tax.

Other sources of taxable income need to be included on the same tax return to ensure a total taxable income figure is reported to HMRC.

Partnerships and VAT

If you have taxable turnover that is more than the VAT threshold then you must register to pay VAT.

Some partnerships choose to register for VAT without reaching this figure so that they can claim back VAT payments.

You must submit your VAT return online and it is also within the jurisdiction of the nominated partner.

Does Making Tax Digital effect Partnerships?

Making tax digital is a government program bringing in changes to the way businesses store and submit information to HMRC.

As of April 2023 the government has not yet confirmed a date when partnerships will be brought into making tax digital for ITSA.

How do I set up a Partnership?

HMRC provides an online partnership registration process which needs you to sign in via your government gateway account.

To register a partnership offline you can complete the SA400 form and post it to HMRC.

After HMRC has processed the application you will be notified and sent a ten digit partnership unique tax reference number (UTR number).

If you’ve joined a partnership HMRC expects all partners individually to register for self assessment by completing form SA401.

Partnership tax return deadlines

The vast majority of partnership tax returns are submitted online.

If you decide to want to file on paper, then you need to download Form SA800. If you prefer to submit your forms online, then you need to buy the appropriate software.

Then you need to report to all your partners to inform them of the losses and profits so that they can include these facts on their individual Self Assessment tax returns.

Missing any of HMRC’s deadlines for filing and payments is just pouring money down the drain.

Substantial fines are consistently imposed. All the partners in a business are liable to pay any fines, not just the nominated partner.

Deadlines for filing Partnership Tax Returns are the same as for individual Self Assessment. The deadlines are:

  • 5th October – register for Self Assessment.
  • 31st October (midnight) – paper submissions.
  • 31st January (midnight) – online submissions.
  • 31st January (midnight) – payment for that year due.

All the records that you have as evidence for your tax return must be kept for 4 years after the 31 January following the end of the tax year in question.

Do I need a Partnership tax return Accountant?

Partnership accountants can help manage your partnership accounts and bookkeeping along with the completion of your partnership tax return.

Your partnership accountant will report to each partner the required figures for their individual self assessment tax returns and can complete each partners personal tax return after the partnership tax return has been finalised.

If you need any support with setting up a partnership agreement asking your accountant is a good place to start for some initial guidance.

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