I have come across something new and wanted to run it by everyone to see what they think.
The scenario is that a partnership business (3 Partners) which has been running for 5 years ceased to trade as a partnership on 31.03.2012 when two of the 3 partners resigned, therefore from 01.04.2012 it will operate as a Sole Trader going forward.
In the year 01.04.2011 - 31.03.2011, £7,000 of assets were purchased which ordinarilly would be allowable for AIA for tax purposes. The remaining partner who will be operating as a sole trader will be using these assets in the future and has offered to give £3,000 to each departing partner to use the assets going forward.
My question is; 1.) Is AIA relief allowable in the 31.03.2012 accounts, I think it is as the business is not ceasing to trade the legal identity is just changing from a P'Ship to a Sole Trader. 2.) How should the £3,000 to each departing partner be treated??
Any views or opinions would be gratefully received.
The question states that the business ceased to trade on the 31st March which is within the year so no AIA (or WDA) was available.
On cessation of the business the transfer is to a linked person so there will be a tax liability on transfer for the equipment unless the partnership continues with a single partner (Which is allowable if the partnership agreement wording has been written up properly). So one cannot assume that the partnership even with only one partner is a sole trader even though that is in effect what it is.
Any payment to the outgoing partners is likely to be a loan by the remaining partner to the business although such could also be an extended distribution of the amount remaining in the business to allow for payment towards the outgoing partners interests.
Much really depends on the actual partnership agreement which may actually render the point mute in that outgoing partners may have no right to the additional payment for their share of equipment that they are walking away from.
Assuming however that the question attempts to play fair then I would go with the payment being a loan to the business by the remaining partner in order to purchase the right to the equipment.
I would also assume that the partnership is to continue as a one partner business until such time as it is viable to incorporate.
Sorry, a lot of if's, and's and Maybe's in there that really need a clear understanding of the partnership agreement that is in effect to make a better judgement.
On the AIA though it's not available for the period in question.
kind regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I'm still a bit confused as I thought that although the partnership itself is stopping and becoming a sole trader, the trade itself is continuing and therefore normal rules apply and AIA would be allowable.
Maybe it's the way I set out my query, but everything I am reading refers to the trade continuing that is the most important factor and not the business structure being amended, so it feels like a bit of a grey area.
But surely that arguement is based on a partnership and a sole trader being the same legal entity where to my mind they are not.
One would not question that an LLP to a sole trader would be a totally different legal form. My take is that normal partnership to sole trader suffers the same rules which is why I suggested that the partnership continues with a single partner provided that the partnership agreement allows for such eventuality (normally included in the death of a partner clause to stop businesses from being broken up when a partner is lost).
If the partnership continues with a single partner then AIA would be available otherwise, unless someone has some pointer to evidence to the contrary, my original answer stands and I believe that the change of structure renders AIA not available due to cessation of the business rules.
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I agree with most of your answer but don't fully understand how a one person partnership can exist as I would call that a sole trader.
In this sitaution, no partnership agreement is in place and it is just a business decision for two partners to leave and look for another career in the future.
I can see your arguement that the partnership is ceasing and I think your right, it is - but the trade continues. You are also right that for the partnership to cease then it would suggest that no AIA would be allowable in the final year. I can't find any past cases to prove if an existing sole trader (bourne of a partnership) is classed as continuation of business or a new business though.
My understanding is that where no written agreement has been created for the partnership (either because they were too mean and/or stupid to have a proper agreement written up by a solicitor) then the partnership would indeed have to be disolved even where such were a partnership with many parttners and only one of them left.
A well written partnership agreement would allow for the partnership to continue as a partnership even where only one partner remained.
There's a handy link on this web page to a simplified version of the 1890 partnership act and also some interesting reading which tends to back up my thinking on matters.
Afraid this seems to be another one of those scenario's where we are both right.
As you say, grey area's! Strange how they are always so black and white during an investigation though!!! lol
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
