ESM8280 - Basic principles: how to work out the profits of the intermediary: partnership example - accounts made up to a date other than 5 April
Paragraph 18(2) Schedule 12 Finance Act 2000
This illustrates the case of an on-going business where:
- accounts are made up to date other than 5 April; and
- all income is derived from relevant engagements
Mr and Mrs B carry on business in partnership and make up their accounts to 30 September each year. They split profits equally but Mr B performs the services. Relief for the deemed payment is given in the accounting period in which it arises.
Partnership accounts show the following figures:
- | Year ended 30/9/2001 | Year ended 30/9/002 |
---|---|---|
Income | 25000 | 30000 |
Expenses | 5000 | 6000 |
Profit | 20000 | 24000 |
Mr B | 10000 | 12000 |
Mrs B | 10000 | 12000 |
Calculation of deemed payment
Step | - | Year ended 05/04/2001 | Year ended 05/04/2002 | Year ended 05/04/2003 |
---|---|---|---|---|
Step One | Income | 27500 | 33000 | 40000 |
- | Deduct | - | - | - |
Step One | 5% flat rate allowance | 1375 | 1650 | 2000 |
Step Three | Employment Income expenses | 3000 | 4000 | 5000 |
- | - | 4375 | 5650 | 7000 |
- | Net | 23125 | 27350 | 33000 |
Step Eight | Secondary Class 1 NICs | 2038 | 2498 | 3112 |
Step Nine | Deemed payment | 21087 | 24852 | 29888 |
Recalculation of partnership’s taxable profit
Revised profit year ended 30/09/2001
- | Amount | Amount |
---|---|---|
Partnership profit | - | 20000 |
Add Disallowed expenses* | - | 625 |
Total | - | 20625 |
Deduct Secondary Class 1 NICs on deemed payment | 2,038 | - |
Deemed payment | 21,087 | - |
Total deductions | 23125 | 20,625+ |
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 - (3,000+1,375)).
+The sum of the deemed payment and secondary Class 1 NICs (21,087+2,038=23,125) is greater than the adjusted Trading Income profit (20,625). Therefore, the deduction is limited to the amount that reduces the taxable profit to nil.
Revised profit year ended 30/09/2002
- | Amount | Amount |
---|---|---|
Partnership profit | - | 24000 |
Add Disallowed expenses* | - | 350 |
Total | - | 24350 |
Deduct Secondary Class 1 NICs on deemed payment | 2,498 | - |
Deemed payment | 24,852 | - |
Total deductions | 27350 | 24,350+ |
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 (6,000 - (4,000+1,650)).
+The sum of the deemed payment and secondary Class 1 NICs is greater than the adjusted Trading Income profit so the deduction is limited to the amount that reduces the taxable profit to nil (paragraph 18(2) Schedule 12 Finance Act 2000).
Overall tax position 2001-02
- | Mr B | Mrs B |
---|---|---|
Trading Income | 0 | 0 |
Employment Income | 24852 | 0 |
Overall tax position 2002-03
- | Mr B | Mrs B |
---|---|---|
Trading Income | 0 | 0 |
Employment Income | 29888 | 0 |