ESM8275 - Basic principles: how to work out the profits of the intermediary: partnership example - accounts made up to 5 April
This illustrates the case where a partnership’s accounts are made up to 5 April and all income is derived from relevant engagements.
Mr and Mrs I carry on business in partnership and make up their accounts to 5 April 2001. All the partnership’s income is derived from “relevant engagements”. Profits are split equally but Mrs I performs the services. Of the partnership’s expenses, only £2,000 of the £5,000 would be allowable under Employment Income rules.
Partnership Accounts year ended 5 April 2001
- | Amount |
---|---|
Income | 25000 |
Expenses | 5000 |
Profit | 20000 |
Allocated Mrs I 10,000 and Mr I 10,000
Calculation of deemed payment on 5 April 2001
Step | - | Amount | Amount |
---|---|---|---|
Step One | Income from relevant engagements | - | 25000 |
- | Deduct | - | - |
Step One | 5% flat rate allowance | 1250 | - |
Step Three | Employment Income expenses | 2000 | - |
- | Total Deductions | 3250 | 3250 |
- | Net | - | 21750 |
Step Eight | Secondary Class 1 NICs on deemed payment | - | 1888 |
Step Nine | Deemed payment | - | 19862 |
Recalculation of partnership’s taxable profit
- | Amount |
---|---|
Partnership profit | 20000 |
Add Disallowed expenses* | 1750 |
Total | 21750 |
Deduct Secondary Class 1 NICs on deemed payment | 1888 |
Deemed payment | 19862 |
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 - (2,000+1,250)).
Overall position for 2000/01
Mrs I’s 2000/01 deemed payment is £19,862. She will pay tax chargeable on Employment Income and primary Class 1 NICs based on this amount.
For the purposes of the deemed payment Mrs I is treated as employed by the partnership. For NICs purposes, the partnership is treated as the secondary contributor and liable to pay secondary Class 1 NICs on the amount of the deemed payment.
There is no taxable Trading Income profit.