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Welcome to QA Accounting for Partnerships!
Thinking about becoming self-employed as a partnership?
There are many different business structures, and each is suited to a different type of business and way of working. So, the very first step is always to consider if starting a partnership is the most appropriate business structure for your business plans?
As one of the UK’s premier online accountants specialising in Partnership Accounting, we can discuss your requirements with you in greater detail to help you decide which may be the most appropriate structure for your business. So please give us call!
Partnership Accounting Expertise
Originating as Qdos Accounting and evolving into QAccounting, our dedicated team has been at the forefront of delivering exceptional accounting services for over three decades. As a QAccounting client, your partnership benefits from an unrivaled depth of experience and expertise, honed across various industries and business structures.
What is Unlimited Liability?
When you operate as a general partnership, you are genuinely in business for yourself! It is a common structure used by people who are starting off in business for the first time or those who want to focus on the business itself while minimising the required level of business administration. It has traditionally been the favourite structure used by professional service businesses such as accountants, lawyers, etc.
But while this freedom is to be welcomed, it does also come with additional risk in the form of “unlimited liability”. What this means is that you are personally liable for any debts incurred by the business. So, it is essential to manage the business responsibly!
Setting Up as a Partnership
We have produced a detailed guide to outline the steps which must be taken to set up as a sole trader or partnership business entitled: QA Setting Up as a Self-Employed Sole Trader or Partnership Guide.
If you are seriously considering operating as a partnership or just interested in what is required to do so, we recommend downloading a copy of this now!
Partnership Responsibilities
In addition to following the steps necessary to set up the business correctly, a self-employed person also has ongoing responsibilities, including:
- Keeping proper books and records
- Submitting a self-assessment personal tax return every tax year
- Paying income tax and NIC on the business “profits”
The concept of paying tax on profits instead of income is an important one and definitely different from being employed!
Genuine business expenses determined by applying the “wholly and exclusively” for the purposes of the business test can be deducted from income BEFORE profit is subject to income tax and NICs.
Therefore, there is a clear incentive to record all business expenses properly and retain evidence in full support of these! For more information about what can be claimed as business expenses when you are self-employed, we have also produced a detailed guide entitled QA Self-Employed Expenses Guide.
So How Does Self-Assessment Work?
That is a very detailed subject which cannot all be included here.
But as a very high-level summary of the main points:
Personal Tax Year and Business Financial Year Differences
A “personal tax year” runs from the 6th of April in one year to the 5th of April in the next.
In the majority of cases, the financial year of the business will not correspond to this period!
Opening Year Rules for Businesses
So, there are special rules which are applied when a business starts trading called the “Opening Year Rules”, and these have been designed by HMRC to ensure that all profits are taxed “at least once” for the opening years. In practice, though, this means that unless a business starts trading on the 5th of April, then it is normally taxed twice on a percentage of their profits in the opening few years, in line with these rules. HMRC does allow these “tax credits” (i.e. overpayments of tax) to be carried forward to offset periods when either the financial year changes or the business ceases trading.
Incentives for Starting at the Tax Year Beginning
Waiting until the business ceases to obtain tax relief never seems very equitable! There is, therefore, an incentive to elect to start the business at the start of a tax year where this is possible, although, in the majority of cases, this will unfortunately not be the case.
Self-Assessment Tax Returns and Deadlines
Business profits should be recorded in the self-assessment personal tax return, which must be submitted BEFORE the 31st of January AFTER the end of the personal tax year in question. So, for the tax year ending 5th April 2023, you must complete and file your self-assessment personal tax return before the following 31st January 2024.
Payment of Taxes and NIC
Payment of any associated income tax and NIC must also be made BEFORE the same date (i.e. 31st January AFTER the end of the personal tax year in question). The amount of tax payable will be the value of profits subject to tax using the opening year rules taxed at the current rates.
Partnership Taxation Rules
Please note that tax for future years must now also be paid in advance using the “payment on account” system. This occurs where the prior year’s taxation exceeded £1000. You pay an estimate of half the current year’s tax (half the tax you paid last year) on 31st January, the same again on 31st July, and the balance due/receivable on the following 31st January. Therefore, going forward, the payment due each 31st January is the balancing amount (under/overpayment) of tax due for the current year and half the estimated tax for next year.
It is important to understand that unlike limited companies, partnerships, regardless of type and structure, are not subject to tax in their own right. A partnership tax return must still be completed and submitted to HMRC. But this is required for disclosure purposes to report the annual profits and how these will be split between the members.
Each of the members must, therefore, also separately register with HMRC for self-assessment and submit their own personal tax returns on the basis of being self-employed, as outlined above.
This can all seem quite confusing initially, but we will be happy to provide examples of how this works in practice to help you!
What Happens If You Work in the Construction Industry?
If you work in the construction industry, then HMRC has created additional rules that you need to be aware of called the Construction Industry Scheme (CIS). This scheme has been designed to try and reduce the frequency of construction workers who are either not submitting tax returns or failing to make self-assessment payments when they are due.
The scheme works by requiring the end client, referred to as the “Contractor”, to deduct tax at source (i.e. similar to an employer) equivalent to:
- 20% of Invoiced Value – Where the worker is referred to as the “Sub-Contractor” HAS registered with HMRC under the scheme.
- 30% of Invoiced Value – Where the worker, referred to as the “Sub-Contractor”, HAS NOT registered with HMRC under the scheme.
Given the huge difference in tax rates, it is clearly essential that workers who are sub-contractors register with HMRC in advance of starting work, which is covered by the scheme, or as soon as possible afterwards, ideally before raising an invoice!
Additionally, if your business also employs other sub-contractors, then you must also register under the scheme as a “Contractor” as well, submit monthly returns to HMRC, and pay the associated tax deducted at source to HMRC.
Invoices summarising the amount of tax deducted at source and the net payment to be made to the sub-contractor must also be supplied to them, and payments of the net amount can then be made directly to their bank account.
It is essential to understand that if you are a sub-contractor because HMRC has collected taxes “at source” before you have deducted expenses, in most cases, you will have paid too much tax! To correct this, you have the option to make a “CIS Reclaim” when you submit your next tax return by recording the correct profit values for the year and the taxes already paid to HMRC at source. HMRC will then repay this overpaid tax to the sub-contractors once they have processed the claim, which can take many months.
Unlike most other accountants who charge clients a percentage of the tax reclaimed for providing a CIS Reclaim service, QAccouting only charge a small flat rate fee, making us market leaders in this space!
What “Basis” of Accounting To Use?
In order to accurately record the profit for the year, you must also decide what accounting “basis” (or method) you are going to apply when the business commences. There are two methods that can be applied:
Cash Basis of Accounting
The cash basis of accounting is available to business with income less that £150,000. And it works by only recording income and expenses when PAYMENTS ARE RECEIVED OR MADE. It is easy to understand and, therefore, frequently the method chosen by new businesses that perform their own accounting.
Accruals Basis of Accounting
The accrual basis of accounting is the method that must be used by larger businesses or voluntarily by other businesses, for instance, those that use an accountant to produce their books and records. It is also used by limited companies. Under the accruals basis, income and expenses are recorded when they are DUE. This is normally determined based on when the services were actually provided. We generally use the accrual basis by default.
What are the “Badges of Trade”?
Due to the potentially more favourable tax treatment of operating on a self-employed basis instead of being employed, there is a always a residual risk that HMRC may challenge a worker’s “self-employed” status at a future date, arguing that they were actually “employed”, and therefore more tax is due!
In order to make this decision they apply a number of criteria called the “Badges of Trade”. Consideration of this areas is beyond the scope of what we can include in a short summary. However, as specialists in the area of sole trader service provision QAccounting can provide advice and guidance to you in this area to help you if required!
Different Types of Partnership
In practice, there are different types of partnerships, and it is important to understand the associated legal and administrative aspects which affect each of these before deciding on the most appropriate structure to use for your business.
In the UK, there are three main structures which are typically used:
General Partnerships
The rules governing general partnerships are contained within the Partnership Act 1890.
What differentiates a general partnership from the other types (discussed below) is that it is not a legal and business entity which is separate and distinct from its members. Each partner acts collectively on behalf of the other partners when conducting business (such as negotiating and entering into legal agreements with third parties), and all partners are jointly and severally liable for the debts and obligations of the partnership.
In practice, this means that one or more partners act on behalf of all other partners to sign contracts, employ staff, and manage the business, and each partner has unlimited liability for the debts of the business.
Similar to the Companies Act, the Partnership Act also dictates that partners have certain responsibilities, such as:
A requirement to produce Accounts, although these do not have to be submitted to Companies House.
A requirement to account for the personal profits made by the partners.
A requirement not to compete with the other partners when conducting business.
General partnerships must have a “Nominated Partner” who acts as the primary contact with HMRC and is responsible for managing the partnership books and records and the submission of the partnership tax return. The Nominated Partner must register the partnership for self-assessment and, where applicable, VAT.
The main benefits of a general partnership include: a lower ongoing administrative burden, greater privacy in terms of the public disclosures which are required, and it is easier for members to join and leave the partnership (providing that at least two members remain).
Limited Partnership
The rules governing limited partnerships are contained within the Limited Partnership Act 1907.
A limited partnership is similar to a general partnership in many respects, and depending on where it is based geographically it can potentially also operate as a legal entity in its own right. A limited partnership based in Scotland is considered to be a legal entity separate and distinct from its members, whereas a limited partnership based in English or Wales is not.
There are two types of members, and there must be at least one of each type of member to form a limited partnership:
- Limited Partners (Silent / Sleeping Partners) – These members are investors who are not involved in the active membership of the partnership, and as a result, their liability may be limited to the value of their capital contributions.
- General Partners – These members are responsible for the management of the partnership and have unlimited liability for the debts and obligations of the partnership.
In practice, limited partnerships are rarely used unless it is desirable for the partnership to have at least one passive investor, as the general partnership and limited liability partnership options are typically more flexible and, therefore, appealing.
Limited Liability Partnership (LLP)
The rules governing limited liability partnerships are contained within a number of pieces of legislation, the earliest being the Limited Liability Partnerships Act 2000.
Similar to limited companies, limited liability partnerships exist as separate legal and business entities in their own right and must therefore be registered as businesses with Companies House, with a registered office address located in the same country in which they are registered.
As a partnership, there must still be at least two members. However, the nature of membership is not restricted to the same extent as a limited partnership. Similar to a general partnership, which must have a “Nominated Partner”, an LLP must have at least two “Designated Partners” who are similarly responsible for managing the partnership books and records, legal submissions, and tax returns. Other members are referred to as “Ordinary Partners”.
The main benefit of an LLP, when compared to a general partnership, is that they have “limited liability” and are therefore not jointly and severally liable for the debts and obligations of the partnership, and therefore, their personal liability can be limited.
Furthermore, each member owes a fiduciary duty of care to the partnership itself, and individual members, therefore, cannot be held responsible for the negligence of other members, although they, of course, remain liable for their own actions!
Limited Liability Partnerships (LLPs) Vs Limited Companies
We have produced a detailed guide comparing these two structures entitled QA Limited Liability Partnerships (LLPs) Vs Limited Companies Guide.
If you are seriously considering operating as either a Limited Liability Partnership (LLP) or Limited Company or just interested in the differences between them, we recommend downloading a copy of this now!
Exceptional Value in Partnership Accounting
At QAccounting, we pride ourselves on offering partnership accounting services at highly competitive prices, often up to 40% more affordable than our competitors. We encourage potential clients to explore our cost-effective solutions and see the difference in value for themselves with a quick, no-obligation quote.
Partnership Accounting for One Low Monthly Fee
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