Part 17: Partnerships
Overview
3177.This Part contains the rules that apply to partnerships. The corresponding rules for income tax are in Part 9 of ITTOIA.
3178.Section 1 of the Partnership Act 1890 defines partnership as “the relation which subsists between persons carrying on a business in common with a view of profit”. Section 4 of the Partnership Act 1890 explains that “firm” is the term used for the purposes of that Act for persons in partnership.
3179.The sections in this Act follow the Partnership Act 1890 and refer to the partners collectively as a “firm”. But the word “partnership” is commonly used as a synonym for “firm”. So the title of the Part and some of the titles of the sections use the word “partnerships”, again following the lead of the Partnership Act 1890.
3180.The rules in this Part determine each partner’s share of the income of the firm. That income share is then charged under the normal rules for the type of income concerned.
Section 1256: Overview of Part
3181.This section introduces this Part of the Act. It is new. The corresponding rule for income tax is in section 846 of ITTOIA.
Section 1257: General provisions
3182.This section introduces the concept of a “firm”. It is new. The corresponding rule for income tax is in section 847 of ITTOIA.
3183.The section drops the references in sections 111 and 114 of ICTA to professions. See Change 2 in Annex 1 and the commentary on section 35.
Section 1258: Assessment of partnerships
3184.This section makes it clear that, for corporation tax purposes, a firm is not an entity distinct from the partners in the firm. It is based on section 111 of ICTA. The corresponding rule for income tax is in section 848 of ITTOIA.
3185.The section extends the treatment of trades carried on by firms to businesses that are not trades. It is based on section 111(10) of ICTA which was repealed in error by ITTOIA. This brings the income tax and corporation tax codes back into line. See Change 84 in Annex 1.
3186.In the case of firms established under English law this provision merely confirms their position under that law. But Scottish firms, for example, are legal entities. This provision ensures that all firms are treated in the same way.
Section 1259: Calculation of firm’s profits and losses
3187.This section contains the basic rules for calculating the profits of a firm. It is based on sections 114 and 115 of ICTA. The corresponding rule for income tax is in section 849 of ITTOIA.
3188.Section 6(4) of ICTA extends the meanings of “profits” and “trades” in sections 114 and 115 of ICTA. None of the partnership rules in this Act applies to chargeable gains. So the extension of “profits” to include chargeable gains is not needed. And for corporation tax purposes a company cannot:
carry on a vocation (see Change 2 in Annex 1);
be employed; or
hold an office in partnership.
3189.So this Act does not rewrite either extension in section 6(4) of ICTA.
3190.If some of a firm’s partners are resident in the United Kingdom and some are not, the profits of the firm’s trade must be determined on different bases. For the resident partners, the determination includes profits arising outside the United Kingdom; for the non-UK resident partners, the determination is restricted to profits arising from a permanent establishment in the United Kingdom. (If there are other United Kingdom profits, a non-UK resident company is chargeable to income tax on those profits and the rules in ITTOIA apply.)
3191.Section 114 of ICTA is not explicit that the profits may have to be determined on more than one basis. This section brings together the rules for resident and non-UK resident partners. Subsection (2) introduces the idea that more than one determination may be needed.
3192.Subsection (3) sets out the normal basis for determining the profits, for a partner resident in the United Kingdom. The profits are determined as if the firm were a company resident in the United Kingdom.
3193.Subsection (4) sets out an alternative basis for determining the profits. If the company partner is not resident in the United Kingdom the profits of the firm are determined as if the firm were a company not resident in the United Kingdom. That determination is restricted to the profits arising from a permanent establishment in the United Kingdom. So there is no need to rewrite the requirement in section 115(4)(b) of ICTA that the partner’s share of the profits is treated as arising from such a permanent establishment.
3194.The profits of the firm are determined by reference to the extent to which they would be chargeable to corporation tax. So, in the case of a non-UK resident, the profits of which the partner has a share are those attributable to a permanent establishment in the United Kingdom.
Changes in partnership
3195.Section 114(1) of ICTA provides that the business profits of a firm are calculated for corporation tax “as if the partnership were a company” (referred to in this part of the commentary as the “deemed company”). This rule applies “so long as” a company carries on the business in partnership.
3196.The deemed company exists only during the life of the partnership. So a company is treated as ceasing to carry on a business when that company takes another person into partnership (because the deemed company then carries on the business). And the deemed company is treated as ceasing to carry on a business when the partnership business is taken over by a company on its own.
3197.Furthermore, the deemed company calculation is made without regard to any change in the persons carrying on the business except that a change in the persons is treated as a transfer of the business to a different company if there is no company which carries on the business before and after the change.
3198.The occasions on which a company is treated as ceasing to carry on a business are set out in the rules to which they are relevant (see sections 77(5), 80 and 162(3)). They also appear in this Part in sections 1267(3) and (4) and 1271(3).
Section 1260: Section 1259: supplementary
3199.This section sets out the treatment of losses and distributions in the calculation of the firm’s profits under section 1259. It is based on section 114 of ICTA.
3200.The usual rule is that the profits of the firm are calculated as if the firm were a company. On that assumption it is possible that losses brought forward should be deducted before the (net) profits are allocated to the partners. Instead, subsection (1) makes clear that losses are not taken into account in the calculation of the firm’s profit or loss to be allocated to the partners.
3201.Capital allowances are given as a deduction in calculating profits. So there is no need for the rule in section 114(1)(b) and (2) that gives special treatment to capital allowances. The same applies to balancing charges, which are treated as business receipts. And the rule about charges (also in section 114(1)(b) of ICTA) is not needed because charges cannot be a deduction in calculating the profits of a trade.
3202.There is a closely related rule in section 116(5) of ICTA. It is that, for the purposes of that section, capital allowances and charges are taken into account. As there is no longer a partnership rule that allowances and charges are ignored, there is no need for section 116(5) of ICTA. So it is repealed by Schedule 1 to this Act.
3203.Schedule 1 to this Act introduces a new subsection (4) to section 849 of ITTOA to make clear similarly that losses brought forward are ignored in calculating the firm’s profits for income tax purposes.
3204.Subsection (2) is based on section 114(1)(a) of ICTA, which provides that “references to distributions shall not apply”. It is clear from the context that this rule applies to payments made by the firm. So there is no question of a payment of, say, interest being treated as a distribution by the firm under section 209 of ICTA and being disallowed in calculating the firm’s profit. See Schedule 1 and Change 85 in Annex 1.
Section 1261: Accounting periods of firms
3205.This section sets out how accounting periods of a firm are determined. It is based on section 114 of ICTA. The concept of an accounting period of a firm is used in section 1259 for the calculation of the firm’s profit or loss.
3206.An accounting period of a firm begins when the rule in section 114(1) of ICTA first applies. That is, when a company first carries on the trade etc in partnership. That circumstance is set out in subsections (2)(b) and (3) of the section.
3207.An accounting period of a firm ends when the rule in section 114(1) of ICTA no longer applies. That is, when the last company leaves a firm, or (if the company continues to carry on the trade etc) when the company is no longer in partnership. That circumstance is set out in subsections (2)(c) and (4) of the section.
3208.An accounting period of a firm ends when there is a change in the persons carrying on the trade etc and the change is treated by 114(1)(c) of ICTA as the transfer of the trade etc to a different company. That is, when there is no “corporate continuity” between the members of the firm before and after the change. That circumstance is set out in subsections (2)(d) and (5) of the section.
3209.The usual rules about an accounting period ending on a date to which the firm makes up accounts and about an accounting period ending on the expiration of 12 months apply without being specifically mentioned in this section.
Section 1262: Allocation of firm’s profits or losses between partners
3210.This section is the link between the firm’s profit or loss and the amounts assessable on the partners. It is based on section 114 of ICTA. The corresponding rule for income tax is in section 850 of ITTOIA.
3211.The basic rule in this section applies in most cases. But, if the basic rule produces a loss for a partner when the firm’s result is a profit, the allocation is adjusted under section 1263. Similarly, if the basic rule produces a profit for a partner when the firm’s result is a loss, the allocation is adjusted under section 1264.
3212.In a firm where some partners are liable to income tax and others liable to corporation tax, the rules requiring an adjusted allocation are not straightforward. In this Act they are set out in two separate sections. The Act amends ITTOIA to set out the income tax rules in the same way (in new sections 850A and 850B of ITTOIA) – see Schedule 1.
Section 1263: Profit-making period in which some partners have losses
3213.This section sets out what happens if the calculation of a partner’s share of the firm’s profit or loss under section 1262 produces a loss, even though the overall result for the firm is a profit. It is new. The corresponding rule for income tax was in section 850 of ITTOIA but is now in the new section 850A of ITTOIA.
3214.The section is most likely to apply when one or more partners are entitled to a salary or interest on the firm’s capital. A partner’s “loss” determined under section 1262 is, in effect, reallocated to the other partners, to reduce their shares of the profit. See Change 86 in Annex 1.
3215.Subsection (2) sets out the position for company A if it has a profit but any of the other partners has a loss determined under section 1262. The rule is that company A’s profit is reduced so that the total of the shares of the profit-making partners is no more than the amount of the firm’s profits.
3216.If some of the members of the firm are UK resident and some are non-UK resident (see section 1259), the measure of the firm’s profit may vary, depending on the residence of the partner “in relation to” which the firm’s profit is calculated. Similarly, if any of the partners is chargeable to income tax, that partner’s share is determined under ITTOIA and not under section 1262.
3217.So subsection (2) refers to “the comparable amount” for a partner. This amount may be on a basis different from that appropriate for that partner under section 1259 or the corresponding ITTOIA rule.
Section 1264: Loss-making period in which some partners have profits
3218.This section sets out what happens if the calculation of a partner’s share of the firm’s profit or loss under section 1262 produces a profit, even though the overall result for the firm is a loss. It is new. The corresponding rule for income tax was in section 850 of ITTOIA but is now in the new section 850B of ITTOIA.
3219.The section is the mirror-image of section 1263. It is most likely to apply when one or more partners are entitled to a salary or interest on the firm’s capital. A partner’s “profit” determined under section 1262 is, in effect, reallocated to the other partners, to reduce their shares of the loss. See Change 86 in Annex 1.
3220.Subsection (2) sets out the position for company A if it has a loss but any of the other partners has a profit determined under section 1262. The rule is that company A’s loss is reduced so that the total of the shares of the loss-making partners is no more than the amount of the firm’s losses.
3221.If some of the members of the firm are UK resident and some are non-UK resident (see section 1259), the measure of the firm’s loss may vary, depending on the residence of the partner “in relation to” which the firm’s loss is calculated. Similarly, if any of the partners is chargeable to income tax, that partner’s share is determined under ITTOIA and not under section 1262.
3222.So subsection (2) refers to “the comparable amount” for a partner. This amount may be on a basis different from that appropriate for that partner under section 1259 or the corresponding ITTOIA rule.
Section 1265: Apportionment of profit share between partner’s accounting periods
3223.This section allocates a partner’s share of the firm’s profit or loss to accounting periods of the partner. It is based on section 114 of ICTA.
Section 1266: Resident partners and double taxation agreements
3224.This section ensures that a UK resident company partner’s share of the income of a foreign firm remains liable to United Kingdom corporation tax even though the income of the firm as a whole is exempt from United Kingdom corporation tax in accordance with a double taxation agreement. It is based on section 115 of ICTA. The corresponding rule for income tax is in section 858 of ITTOIA.
3225.The business profits article of the United Kingdom/Jersey double taxation arrangement exempts the profits of a Jersey firm from United Kingdom tax. In the case of Padmore v CIR (1989), 62 TC 352 CA(7), the Court of Appeal decided that the exemption extended to the share of the profits arising to a United Kingdom resident individual. The rules in section 115(5) to (5B) of ICTA were enacted to remove the exemption.
3226.Subsection (1) sets out the type of company and firm with which the section is concerned. It goes on to identify the sort of exemption from tax that was considered in the Padmore case.
3227.For United Kingdom tax purposes, if it is necessary to consider where a firm is resident, the question is likely to be decided by the place where the firm’s business is controlled and managed. But it is possible that, under foreign law, a firm may be considered to be resident elsewhere, for example, by reference to where the firm was established. So the section uses both the “control and management” test and the “resides” test.
3228.Subsection (2) makes it clear that the section does no more than remove any exemption under a double taxation arrangement. It does not deny other reliefs, such as tax credit relief. See Change 87 in Annex 1.
3229.Subsection (3) deals with United Kingdom tax credits, which may be relevant to the calculation of a company’s “shadow ACT” (see SI 1999/358, made under section 32 of FA 1998). A double taxation arrangement may give a non-UK resident “person” an entitlement to payment of a tax credit on a distribution by a United Kingdom company. This subsection makes it clear that, where that “person” is a firm, only a UK resident partner has the entitlement.
3230.Section 115(5A) of ICTA applies also to capital gains. That part of the rule is not rewritten in this Act. It is moved to TCGA by an amendment to section 59 of TCGA (see Part 2 of Schedule 1 to this Act).
Section 1267: Various rules for trades and property businesses
3231.This section clarifies the position of firms that are affected by the rules in Chapter 14 of Part 3 or section 262 of this Act. It is based on paragraph 13 of Schedule 22 to FA 2002 (as applied to property businesses by section 21B of ICTA). The corresponding rule for income tax is in section 860 of ITTOIA.
3232.The section differs from its income tax equivalent because a positive adjustment on a change of basis is dealt with differently for income tax and corporation tax. For income tax, such an adjustment is the subject of a separate charge, in section 228 or 330 of ITTOIA. For corporation tax, the adjustment is treated as a trade or property business receipt and so is charged to tax under section 35 or 209.
3233.This section explicitly applies to property businesses. In ITTOIA the position is different because the extension to non-trade businesses in section 847 of ITTOIA does not apply to section 860. But section 860 of ITTOIA does apply to property businesses as a result of section 272(1) of ITTOIA, because the restriction in section 272(2) does not exclude rules outside Part 2 such as those in Chapter 7 of Part 3 of ITTOIA. Schedule 1 to this Act amends section 860 of ITTOIA to clarify the income tax position, with a minor related amendment to section 847 of ITTOIA.
Section 1268: Election for spreading under Chapter 14 of Part 3
3234.This section sets out two rules for firms that make an election under section 186. It is based on section 114 of ICTA and paragraphs 9 and 13 of Schedule 22 to FA 2002. The corresponding rules for income tax are in section 860 of ITTOIA.
3235.Subsection (1) ensures that the adjustment charge is not “rolled up” under section 186 just because a company leaves or joins the firm.
3236.Subsection (2) is the rule about making an election under section 186. The “date on which the new basis was adopted” is defined in section 1269.
Section 1269: Interpretation of Sections 1267 and 1268
3237.This section explains expressions used in the two preceding sections. It is based on paragraph 13 of Schedule 22 to FA 2002. The corresponding rule for income tax is in section 860(6) of ITTOIA.
Section 1270: Special provisions about farming and property income
3238.This section clarifies the position of firms that carry on a farming trade or property business. It is based on sections 15, 53 and 70A of ICTA. The corresponding rule for income tax is in section 859 of ITTOIA.
3239.In section 53(2) of ICTA there is a rule that all farming carried on in the United Kingdom by a company is a single trade. The section refers to a “particular company or partnership”.
3240.In section 15 of ICTA there is a similar rule that all property income activity carried on by a person forms a single property business. Paragraph 1(3) of Schedule A refers to a “particular person or partnership”. Section 70A(4) of ICTA, which deals with overseas property businesses, refers to a “particular company or partnership”.
3241.Subsection (1) is the rule that all farming carried on by a firm is a single trade. The subsection also makes it clear that the firm’s single farming trade does not include any farming trade carried on by a company separately from the firm.
3242.Subsections (2) and (3) are the corresponding rules for UK property businesses and overseas property businesses.
Section 1271: Sale of patent rights: effect of partnership changes
3243.This section sets out what happens when there is a sale of patent rights by a trader and there is change in the membership of any firm that carries on the trade. It is based on section 558 of CAA. The corresponding rule for income tax is in section 861 of ITTOIA.
3244.The rules for intellectual property are split:
the rules that give capital allowances are in CAA;
the rules that charge capital receipts from the sale of patent rights are in Chapter 3 of Part 9; and
the special rules that apply to firms are set out in this section and section 1272.
3245.If a trader receives a sum from the sale of patent rights in the ordinary course of the trade the sum is a trade receipt. In that case, it is not a “capital sum” and section 913(1)(a) of this Act ensures that the special rules do not apply.
3246.If a trader receives a capital sum from the sale of patent rights, the sum is excluded from the calculation of the trade profits by the general rule that excludes capital receipts. Instead, the sum is separately charged to corporation tax under Chapter 3 of Part 9 of this Act. The profit on the sale is charged to tax over six years. But the seller may elect to have the sum charged in the year in which the proceeds of sale are received. Or the charge may be spread in accordance with section 916 or 917 of this Act.
3247.In the case of a taxpayer liable to corporation tax, Part 8 of this Act sets out rules for the taxation of gains and losses on companies’ intangible fixed assets. Those rules take priority over any other tax rules (see section 906(1)). So the Part 8 rules generally apply instead of the rule in this section. But Chapter 16 of Part 8 ensures that the Part 8 rules apply only to assets created or acquired on or after 1 April 2002.
3248.Subsection (1) sets out the conditions for the section to apply. In particular, there has to be:
a charge (to income tax or corporation tax) on the proceeds from the sale of patent rights; and
a change in the persons carrying on the trade during periods in which tax is chargeable.
3249.Subsection (4) determines the amount to be charged as income of each company in the period of change. That amount is in two parts:
for the period up to the change, a time-apportioned part of the amount that would otherwise have been charged for the whole period; and
for the period after the change, the company’s share of the amount still to be charged after the change, apportioned to the period on a time basis.
3250.Subsection (5) sets out the general assumption that all the current partners step into the shoes of the persons who were partners at the time of the original sale. The amount charged in each accounting period is arrived at by spreading the remaining charge evenly over the rest of the period for which tax would otherwise have been charged.
3251.One of the consequences of the current partners stepping into the shoes of the original partners is that an amount originally charged to income tax may become charged to corporation tax, and vice versa. This consequence was not explicitly acknowledged in ITTOIA. So Part 2 of Schedule 1 to this Act amends sections 861 and 862 of ITTOIA to clarify how the rule works for income tax. See Change 89 in Annex 1.
Section 1272: Sale of patent rights: effect of later cessation of trade
3252.This section sets out what happens when there has been a sale of patent rights to which the previous section applied and the last corporate partner leaves the firm. It is based on section 525 of ICTA. The corresponding rule for income tax is in section 862 of ITTOIA. See also paragraph 32463246 of this commentary about the effect of Part 8 of this Act and Change 89 in Annex 1.
3253.Subsection (2) sets out how the “rolled-up” charge is split between the current partners on cessation of the trade. As in section 525(4) of ICTA, the charge is made on the persons who are partners immediately before the cessation. Otherwise, the charge would be allocated by reference to the profit-sharing arrangements in the whole of the final accounting period. Schedule 1 to this Act amends section 862 of ITTOIA to clarify how the rule works for income tax.
Section 1273: Limited liability partnerships
3254.This section contains the rules that treat limited liability partnerships (“LLPs”) in the same way for tax purposes as ordinary partnerships (“firms” in this Act). It is based on section 118ZA of ICTA. The corresponding rule for income tax is in section 863 of ITTOIA.
3255.Subsection (1)(a) ascribes the activities of the LLP to its members. Subsection (1) does not refer to an LLP carrying on a profession. See Change 2 in Annex 1.
STC [1989] 493