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Allocation of Partnership profits for tax purposes

We are moving along nicely now, a good proportion of our clients tax returns have been submitted to HMRC, and we are working through the usual late comers and chasing those who have not yet sent in their information.

Some clients just dread going through their papers to find the information to prepare their tax returns but some clients are still arguing about how the profits should be shared in their partnership and of course until that is agreed, the individual tax returns cannot be submitted... or can they?

How does this normally work in practice? The partnership tax return is completed and from that form, each partner is given a 'partnership short' in which he or she declares their profits on their own tax return.

These individual forms when added together will agree to the figures on the partnership tax return. But when there is a dispute about the sharing of profits, the partnership tax return is held up and none of the tax returns can be submitted until the issue is agreed.

This may mean that tax refunds cannot be made as the completed return will be required to process the claim. It may mean that some GPs are uncertain of their liabilities until HMRC issue the tax calculation based on the tax return. In some cases, a GP disputing the profit shares can use the delay in agreeing the tax return as a negotiating tactic as the other partners will want the return sent in.

Hot off the press is news from HMRC. They now give guidance on what to do in such a case. Where such a dispute exists, the individual partner should enter the profits they believe are correct (rather than the figures from the partnership tax return) and explain what and why they have done so on the 'white space' on the return.

The link above is actually to HMRC’s own manuals to their Inspectors. Towards the end of the guidance the Inspector is advised that "you may need to open enquiries into the returns in order to establish the correct position" – so although this is helpful, you have been warned.

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