Self-Assessment tax returns for partnerships explained

Partnerships have unique tax considerations that set them apart from other businesses like sole traders and limited companies.

Understanding these distinctions is crucial for ensuring compliance with HM Revenue & Customs (HMRC) and for optimising your tax liabilities.

This article explains how to perform Individual Self-Assessment tax returns (ITSA) for partnerships.

The basics of ITSA for partnerships

In a partnership, each partner is responsible for their own tax affairs.

This means that partners must complete an individual ITSA, detailing their share of the business’ profits or losses.

This is in addition to the Partnership Tax Return (SA800) that the nominated partner files on behalf of the partnership.

MTD for VAT

The introduction of Making Tax Digital (MTD) has added another layer of complexity for partnerships in the UK.

Under MTD, partnership businesses with a turnover above the VAT threshold are required to keep digital records and submit their VAT returns using MTD-compatible software.

The scheme aims to make tax administration more efficient but necessitates that partners become adept at using digital tools to maintain compliance.

Unique features of partnership ITSA

Shared responsibility

Sole traders bear the entire tax burden themselves. In limited companies, the business is a separate legal entity responsible for its own taxes.

Partnerships, on the other hand, utilise shared responsibility to manage tax obligations.

Each partner's tax liability is proportional to their share in the partnership.

This makes it imperative for partners to accurately report their individual income and expenses.

Nominated partner

One of the partners in the business must be designated as the 'nominated partner'.

This individual is responsible for filing the Partnership Tax return, which provides a comprehensive overview of the partnership's financial activities.

However, this does not absolve other partners from their obligation to file individual Self-Assessment returns.

Class 2 and Class 4 National Insurance Contributions

Partners are required to pay both Class 2 and Class 4 National Insurance Contributions (NICs), based on their share of the partnership's profits.

This is different from limited companies, where directors usually pay themselves a salary and dividends.

NICs can vary each tax year, so it's essential for partners to stay updated on the latest rates and ensure accurate calculations and payments are made.

Capital allowances and reliefs

Partners can claim capital allowances and reliefs on assets that are used in the partnership business.

However, these must be claimed on the Partnership Tax Return and then allocated to each partner according to their profit share.

Record-keeping

Maintaining meticulous records is often more crucial in partnerships than other business arrangements.

Partners need to keep track of not just income and expenses, but also any changes in partnership agreements, profit-sharing ratios, and capital contributions, as these directly impact each partner's tax liability.

While the fundamental principles of Self-Assessment apply to all business structures, partnerships have specific complexities that require careful attention.

From shared responsibilities to unique National Insurance responsibilities, understanding these differences is key to navigating partnership taxation effectively.

If you need help with your ITSA this year, get in touch with one of our expert accountants.