How to prepare partnership returns. How are partnership profits calculated? How are corporate members of partnerships taxed? What are the differences between the tax treatment of individual and corporate partners? 

A guide for subscribers. 

At a glance

At a glance

Partnerships, their partners and different sources of income

Partnerships come in several forms which include general partnerships, limited partnerships and Limited Liability Partnerships (LLPs).

A partnership is normally treated as transparent for tax purposes. 

  • Its activities are deemed, for tax purposes, to be undertaken by its partners.
  • Certain partnerships can have a mixture of individuals and corporates as partners. There are differences between the tax principles governing income and corporate taxes and these need to be reflected when calculating the applicable profit shares.
  • Some sources of income need to be declared on Partnership Returns in line with the tax year, while others are in line with the partnership accounting period ending in the tax year.  
  • When preparing the returns for the partners, the income on the Partnership Return is not necessarily the income that needs to be included on the partners' return. See Accounting periods and tax basis periods

Note that an LLP that does not carry on a business with a view to profit or that is in liquidation or is being wound up by order of the court, is not transparent for tax purposes and as such is subject to Corporation Tax on any taxable profits or chargeable gains.

Anti-avoidance rules for partnerships

There are various anti-avoidance provisions applying to partnerships. These include:

What's new?

Basis Period reform

2023-24 is the transitional year for basis period reform.

Basis year reform affects any sole trader business or partners in a partnership business that has an accounting period end which ends other than between 31 March to 5 April.

  • If you have an accounting year-end which ends on or between 31 March to 5 April, you are already preparing acocunting on 'the tax year basis', this means that Basis year reform has no imparct on you.

The individual partners, not the partnership must report transitional year profits which can be spread over five years. They may elect to use them differently.

Partnerships may wish to decide to change their accounting period to 5 April (or 31 March). This is a decision to be made by the partners.

  • It is potentially simplest in terms of reporting to make that change at the start of the 2024/25 tax year.
  • As partners will need to calculate their share of partnership profits in a combination of the current year basis and on the tax year basis in 2023/24, the changes to an accounting period date may was well happen at the end of 2023/24.

Finance Act 2022 provides that from April 2024:

  • Self-employed trading profits, including partnership profits, will be allocated to tax years regardless of the business’ accounting period end date.
  • 2023-24 will be a transitional year with the new rules fully operative from April 2024.
  • Where higher profits arise in 2023-24 due to the change in basis, an automatic five-year spreading rule will apply to the additional profits.

See Basis Period Reform