Changes to profit allocations for trading partnerships and LLPs

What does basis period reform mean for partnerships? 

We understand that the partnership tax return will continue to report the profits of the business based on the accounting period. This means that partners of partnerships that do not align their accounting date to the tax year will need to apportion the profits allocated to them for two accounting periods when preparing their self-assessment tax returns. 

As accounts may not be available for the second period until after the tax return filing deadline (31 January), partners will need to estimate their profit allocation and then subsequently amend their returns when the final profit details are confirmed. This can be particularly difficult for investment managers who may need to include, at least in part, two years' performance fees. 

Many partnerships will want to assist the partners by providing them with estimated profit allocations, the planning for which, should start as early as reasonably possible.  

It should also be noted that where there are US headquartered businesses, or US taxpaying principals, these estimates will be required even sooner, so partners can pay the UK tax due before the end of the calendar year to align foreign tax credits for US tax purposes. 

Why is accurately estimating partner profit allocations important? 

While penalties are unlikely to be issued for genuine underestimated profits reported by the partners, interest will be charged from when the tax on the underestimated profits was originally due to be paid. 

As HMRC have continued to increase the interest rates charged on late and underpaid tax payments in line with the Bank of England’s base rate of interest, it is important that estimates are as accurate as possible to avoid higher interest charges. 

To align or not? 

Trading partnerships that have wholly UK operations are likely to choose to align their accounting date with the tax year, as any tax benefits of using a different accounting date will no longer be available. Read more here about how to change your year end.

The choice is more difficult for partnerships that are part of a larger international group, are headquartered outside the UK, or have US taxpaying principals, as an alignment with the UK tax year would result in the partnership no longer being coterminous with the rest of the group.