The self-assessment system, which will affect the tax year ending 5 April 1997, does not involve a new tax, nor will it affect the overall amount of tax you pay. There are, however, many issues to consider and changes in practice to implement. If you have not already started planning, you cannot afford to wait any longer.
Personal liability for partnership tax
The “joint and several” liability that used to exist for partnership tax is being replaced by a personal liability of each partner to pay tax on their share of the firm's taxable profits.
Each partnership will have to decide whether it wishes to continue to retain monies for partners' tax or to leave this to each individual. In practice, most firms will need to continue to hold funds back from drawings and profit shares. Such monies will previously have been used as part of the firm's working capital and any change in practice would lead to the firm asking partners to subscribe additional funds as partnership capital.
Tax payment dates
Partnership tax is currently payable in two instalments. However, under self-assessment there will be three liabilities to tax each year.
The first two payments will each be set at 50 per cent of the total liability of the previous year. The third payment will represent the difference between the current year's tax liability and the total amount paid the previous year.
The first year of the new system, 1996/97, involves a transition from the old to the new system. A partnership assessment will have been issued and tax payments made by the firm in January and July 1997.
For 1996/97 profits will still be allocated by reference to the profit sharing ratios covering the tax year as distinct from those which applied in the periods when the profits were earned. In this regard the new system will introduce a welcome simplification from 1997/98. From that year the profits of each accounting period will be shared, for tax purposes, in exactly the same way as they were allocated within the accounts.
New partnership tax return
A single representative partner will be responsible for submitting the new partnership return together with a detailed statement showing the amount of each source of income and how this is shared between each partner during the period covered by the return.
Partners' personal self-assessment tax returns will include a special schedule dealing solely with their share of partnership income.
The new partnership return, and supporting documentation, must be submitted by 31 January of the year following the end of the tax year. Individual partners will need to submit their tax returns by the same date. Relatively new partners will often be forced to include estimated figures on their returns. This is because of the new “opening year” rules which will apply to individual partners during the first and, in many cases, the second tax year after they join an existing partnership.
If the partnership returns and statements are submitted late by the representative partner, each and every partner is liable to a fixed penalty of at least £100.
In many cases, partnership agreements will need to be amended to avoid inequitable treatment of new, existing and departing partners. The move to self-assessment has a number of other consequences which affect partnership agreements and on which advice should be sought.
This includes new indemnities, new obligations on the firm, and clarifying the nature and extent of tax retentions each year.
Everyone will need to retain vouchers and records for all business-related expenditure whether incurred personally or by the firm.
Such records need to be retained until five years after the filing date for the tax return. Penalties of up to £3,000 could be charged if such records have not been properly retained.
Internal timetables for producing accounts, allocating profits, producing tax returns and finalising tax computations may need to be reviewed.
This is particularly true where firms are considering changing their year-end to 31 March as a result of the longer term benefits that this will provide in many cases.
Finally, partners should definitely be talking to their tax advisers.
self-assessment: key features affecting partners>
New-style tax returns for individual partners and for each firm.
an obligation to complete all entries fully (including your share of the firm's taxable profits) before sending in your tax return.
The new current-year basis of assessment of profits.
Tax on partnership profits payable personally by partners rather than by the firm.
New fixed dates for paying tax – 31 January and 31 July each year.
More restrictive rules as to when tax relief can be obtained for pension contributions each year.
Automatic fixed penalties for late, incorrect or incomplete personal tax returns.
Separate penalties on each and every partner if the part-nership tax return is submitted late.
A new obligation to keep personal and business records for between six and seven years.
New Inland Revenue powers to make enquiries at random into any taxpayer's affairs to check that the right amount of tax has been paid.