Partnership traps
A partnership exists where two or more people work together with a view to making a profit from a business. There doesn’t have to be a formal partnership agreement in place, but it’s a good idea to have one drawn up if you intend to trade in this way.
Before choosing to operate as a partnership, in preference to say a limited company, it’s worth considering the downsides.
A partnership must submit a separate tax return for the firm to HMRC, in addition to the partners’ own personal tax returns. If that tax return is late, every partner is charged a £100 penalty. The firm’s nominated partner can appeal against this, but the other partners cannot. HMRC won’t accept changes to the partnership tax return from anyone other than the nominated partner. This means if the partners disagree, the junior members have little control over the tax and penalties they have to pay.
A combination of a partnership and a company is often presented as a means to save tax, but this structure doesn’t always work, as a recent case showed. A partnership owned the cars used by members of the Cooper family, but two were also directors of the family company. HMRC taxed those two people on the cars provided to all the others, arguing that all the cars were provided to their relations by reason of the directors’ employment and their personal relationships. The tax tribunal agreed.
If the partnership includes a company as a member, the partnership can’t claim the annual investment allowance (AIA), which gives 100% deduction for the cost of equipment. The AIA currently covers up to £25,000 of equipment purchased per year.
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