Accounting and Taxation
As any other business, partnerships must do accounting and bookkeeping and keep records showing expenses and business income. Partnerships may do their accounts on their own or employ an accounting company.
Accounting and bookkeeping serve to:
- make annual partnership self-assessment tax returns to HMRC.
- make self-assessment returns for partners who are usually self-employed
- control and balance accounts with suppliers, customers, employees and banks.
- prepare financial reports about the business.
- prepare financial documentation for investments, bank loans and insurances.
- deliver reports on assets and inventory
Partnerships do not pay income tax such as for instance limited companies. Profits of partnerships are shared between the partners in accordance with their partnership agreement. As such, before tax profits are transferred from the partnership to its partners. Partners, either self-employed or companies or both must pay their income tax and if needed Class 4 National Insurance Contributions on profits yielded from the partnership.
To sort out their income tax, partnerships should to take the following steps:
- officially register a partnership with HM Revenue & Customs.
- calculate profit of the partnership on the basis of accounting records
- share the partnership profit among partners of the partnership in accordance with their partnership agreement.
- prepare a partnership Self-Assessment tax return and submit it to HMRC in a paper form by 31 October or electronically online by 31 January following the end of the tax year.
A partnership must send its tax return to HMRC even if it did not trade at and had no have income in the tax year.
Partners who are self-employed, must prepare at the same time their own Self-Assessment tax returns and submit them to HMRC. Partners will have to add the partnership profits to their taxable income from all other sources. Income tax and NICs must be paid by partners by 31st January following the end of the tax year.
VALUE ADDED TAX (VAT)
VAT is an indirect tax levied consumers on most goods and services provided in the UK or imported from other EU and non-EU countries. VAT is charged on goods and services at different levels. Standard rate 20% applies to most goods and services. Reduced rate 5% applies to some goods and services such as children’s car seats and home energy and zero rate applies to most food and children’s clothes.
It is important to understand that VAT regulations apply to partnerships in the same way as they do to other business types, for instance to limited companies. A partnership must apply for VAT number to HMRC if its turnover for the previous 12 calendar months has exceeded the VAT registration threshold of £83,000. If desirable, a partnership can also apply for VAT voluntarily.
Partnerships which use commercial premises have to pay business rates to the local authorities.