The Finance Bill does confirm the governments other proposals from September and details how tiered partnerships will report their profit allocations to HMRC, makes the profit share reported in the partnership return binding on partners, outlines a new appeals process when there are disputes over the allocation of taxable profits within a partnership tax return, and deals with bare trust holdings of a partnership share.

Allocating a firm's taxable profits

A surprise in the Finance Bill published on 1 December was the dropping of the government’s proposal to determine exactly how a partnerships taxable profits are to be allocated between partners. In September the government published a draft clause for consultation which proposed determining that taxable profits would need to be allocated between each partner in proportion to their share of the firm’s total accounts profits for the relevant accounting period.

This would mean that a firm’s ‘tax disallowables’ would no longer be capable of being shared in variable profit share ratios (i.e. the marginal profit share ratios of the top slice of profit) or otherwise weighted to one group of partners.

Commentators highlighted that several common situations that would be impacted, in particular where:

• junior or fixed share partners have been protected from the impact of ‘tax disallowables’
• firms do not currently attribute ‘tax disallowables’ to bonus profit shares or interest on capital
• different sources of profit are shared differently and the relevant disallowables attributed to the share of each particular source
• disallowables attributed to a partners ‘private use’, for example motor expenses, are currently allocated to the partner concerned.

In papers released with the Budget in late November the government advised that the draft legislation was being ‘revised to be more compatible with the commercial arrangements for allocation shares of profit’.

This revision was to completely remove the draft clause.

The current legislation of s850 ITTOIA 2005 thus remains unaltered. As a reminder it states that a firm’s taxable profits are to be allocated ‘in accordance with the firm’s profit-sharing arrangements during that period’.