Commentary on Sections Overview Section 850: Allocation of firm’s profits or losses between partners
3164.This section is the link between the firm’s profits and the amounts assessable on the partners. It is based on section 111(3) of ICTA.
3165.Subsections (2) and (3) set out what happens if the calculation of a partner’s share of the firm’s profits under subsection (1) produces a loss, even though the overall result for the firm is a profit. This is most likely to arise when one or more partners are entitled to a salary or interest on the firm’s capital. The “loss” determined under subsection (1) is reallocated to the other partners, to reduce their shares of the profit. See Change 143 in Annex 1.
3166.It is also possible for the calculation of a partner’s share under subsection (1) to produce a profit, even though the overall result for the firm is a loss.
3167.Subsections (4) and (5) set out what happens in the case of an overall loss. The “profit” determined under subsection (1) is reallocated to the other partners, to reduce their shares of the loss. See Change 143 in Annex 1.
3168.Subsection (6) contains definitions. If at least one of the partners in the firm is liable to corporation tax, the firm’s profit (FP) or loss (FL) will include part of the profits or losses allocated to the partner liable to corporation tax, even though that part of the profits is not charged to income tax. So it is necessary, in the reallocation of the profits under subsection (3) or losses under subsection (5), that the total profits (TP) or losses (TL) include those allocated to the partner liable to corporation tax. The definition of “partner” for the purposes of the section makes it clear that partners liable to corporation tax are part of the picture.