Partnerships - Help !!

[webman11]

I hope someone can help.

I and another person set up a partnership last year. Both put in around £20,000 in to set the business up. We have a profit share every quarter and divide the profits up as outlined in our partnership agreement.

We've had about £8,000 back in profits so My question is, do we as individuals pay tax on the profit share recieved? Or do we only pay tax once our original investment has been recovered? Can someone please help.

Many thanks in advance.

[elainec100@cheapaccounting]

Taxed on profit share

[David Griffiths]

The partnership makes a tax return of profits actually earned in the relevant period. That profit is allocated between the partners - usually equally, but perhaps not, depending on the agreement

Each partner declares their share of profit in their personal self assessment returns and pays tax based on that, and their other circumstances, whether it has been distributed or not

It doesn't matter if you've recovered your original investment or not

[Dave Shaw]

I think the only way you could have structured it to only pay tax once the £20k had been recovered is if you had invested into a limited liability partnership in the main as an interest free loan and with a small amount of 'capital'.

But I'm no tax expert.

[webman11]

So, for arguments sake, if we didnt recover the original investment made (20k) and teh business went bust we'd still have to pay tax on any profit share returns recieved up until that point?

The £20k I invested was saved whilst an employee, so in effect i was taxed and have invested money with a big risk. Surely profits returned must take into account the original investment?

Thanks for the replys

[elainec100@cheapaccounting]

Nope - investment is capital.

Tax is paid on all income.

With respect if you went bust it could be because you were making a loss - that loss could be offset against other income.

[David Griffiths]

I think the only way you could have structured it to only pay tax once the £20k had been recovered is if you had invested into a limited liability partnership in the main as an interest free loan and with a small amount of 'capital'.

But I'm no tax expert.

Doesn't work. LLPs are taxed in the same ways as ordinary partnerships

[Dave Shaw]

David G

Why do Venture Capital firms structure their funds as 99% loans into the partnership and 1% capital?

[elainec100@cheapaccounting]

The loan gets paid back!

The issue here is if the profit liable to tax is reduced by the loan repayments.

Interest is an allowed cost in the profit calculation but the capital element of a loan cannot be deducted as a cost in calculating profit.

Tax is paid on the profit - which is what the OP asked about.

[Dave Shaw]

Elaine sorry I have gone off post as it is an area of interest - I thought the structure of loans v capital was tax related which I think you are saying it is not:

i.e. if a partnership had made £100k and there were £50k of loans outstanding then this £100k would be distributed £50k as a loan and £50k as a normal partnership drawing. The partners would be taxed on the full £100k.

If there had been no loans then the £100k would just be drawn out of the partnership and taxed on £100k and the overall effect on the partners would be the same.

The only benefit of going down a loan route is if the partnership became insolvent then the loans would rank for dividend purposes.

Is that correct?

Many thanks

[elainec100@cheapaccounting]

Firstly a partnership does not have dividends.

Then the loan is a balance sheet item and a debt.

Tax is paid on profit.

Profit = Income - Cost

If £100k is made - yes this is all taxed.

How it is distributed depends on the partnership agreement.

How the loans are repaid depends on the loan agreement.