The tax position when partners do not receive the profit share they are allocated

In a partnership, activities are treated as being carried out by the individual partners, not the partnership (which is not a separate legal entity). The partnership itself does not pay tax or NIC; instead, each partner pays tax on their allocated share of profits or losses. If a partner is a company, corporation tax rules apply to its share.

Sharing Profits and Losses
By default (Partnership Act 1890), profits and losses are shared equally unless a profit sharing ratio (PSR) is set in a partnership agreement. Partnerships are not legally required to have a written agreement, but without one, disputes can arise—especially if contributions vary. Written agreements can set any profit-sharing basis, which can change annually if fixed before year end. PSRs cannot be altered retrospectively, but a flexible PSR clause (e.g. “as the partners shall from time to time decide”) can allow changes during the year.

Changing the PSR
Reasons vary, but changes affect each partner’s tax. Profits/losses must be time-apportioned as of the change date.

Disputed Profit Allocation
Disputes may arise if partners disagree with or have not received the profits shown in the partnership statement. In Morgan v HMRC and Self v HMRC [2009], the Tribunal ruled that the partnership return is conclusive for tax purposes regarding a partner’s share, regardless of whether it was received. HMRC guidance (Enquiry Manual EM7522) states that a partner’s personal return must match the partnership statement.

Declaration on Tax Return
If disputes cannot be resolved before the filing deadline, HMRC advises showing the profit considered correct on the personal return, disclosing the partnership statement’s figure and disputed adjustment in the “white space” section, with an explanation. HMRC will not treat the return as incorrect if this is done.

Practical Tip
Complete the “white space” as above to avoid HMRC treating the return as wrong.