Essentially, a partnership is a group of people who are carrying on a business together with a view to profit. It is worth bearing in mind that a partnership may exist for tax purposes, notwithstanding that it hasn’t been formally registered for partnership law purposes.
The partnership itself will not normally be subject to income tax or corporation tax. Instead, its partners will be taxed (on a similar basis to sole traders) on their share of the profits and gains of the partnership. This does not, however, mean that the partnership will not have any tax liabilities or obligations. For example, the partnership will still have to file a tax return and (where relevant) the partnership may itself be liable for VAT and employer’s NICs, and subject to PAYE obligations.
It is possible for companies, as well as individuals, to be members of partnerships, but that is beyond the scope of this summary.
The partnership itself is not normally liable to income tax in respect of its trading profits. Instead, each partner in the partnership will have to pay income tax on their share of the trading profits (i.e., income minus allowable expenses) of the partnership. A partner’s 'share' of the partnership’s trading profits is the share which is allocated to that partner in the manner specified in the relevant partnership agreement. This may differ from the profits actually paid out to the partner. The profits allocated to each partner form part of their individual income, and should be included in their Self Assessment tax return to be assessed in the ordinary way.
The 'trading allowance', described in the Sole Trader taxes section is not available in respect of a partner’s share of a partnership’s trading income.
A charge to CGT will usually arise when the partnership sells a ‘chargeable asset’ (see list in Different Types of Tax of typical chargeable assets). However, the partnership itself is not normally liable to CGT in respect of any gains made on the sale. Instead, any CGT liability falls on the partners individually (based on how chargeable gains are shared between partners in accordance with the relevant partnership agreement). More specifically, the proceeds from the sale of the relevant asset, and the deductible costs of acquiring and improving the asset, are allocated to each partner in the manner specified in the partnership agreement. If the partnership agreement does not specify the proportions in which assets or capital profits are shared between partners, the sale proceeds and deductible costs are allocated in the same proportions as allocations of income, or (failing that) allocated equally between partners.
The tax is then paid by each partner individually based on their allocated sale proceeds minus their allocated costs of acquiring and improving that asset.
Partners in partnerships are considered ‘self-employed’ for NICs purposes, and so must pay Class 2 and Class 4 NICs (see the Different Types of Tax NICs section), if their share of the partnership profits reaches the relevant thresholds.
The VAT position described in the Different Types of Tax VAT section applies to partnerships. Unlike income tax and CGT, obligations in respect of VAT fall on the partnership, rather than the partners individually.
If a partnership has employees, the position in respect of employee’s NICs, employer’s NICs and PAYE, described in the Different Types of Tax section, may apply to the partnership. The obligations would fall on the partnership, rather than the individual partners.