Annex 1: Minor changes in the law made by the Act: Change 144: Partnerships: carrying on by partner of notional business: section 854
This change makes clear how the basis period rules apply to a non-trade business carried on in partnership.
If a person carries on a business (but not a trade) in partnership, section 111(10) of ICTA provides that subsections (1) to (3) of that section apply as they apply to a trade carried on in partnership. But those subsections do not import the special basis period rules in sections 60 to 63A of ICTA. So the income of the firm is assessed on the basis of the income arising or profits accruing in the tax year.
The position changes if the firm also carries on a trade. Then each partner’s share of the trading profits is assessed, in accordance with the rules in sections 60 to 63A of ICTA, on the profits of basis periods which may differ from tax years. A consequence of that treatment is that section 111(7) and (8) of ICTA apply to the non-trading income of the firm. So the non-trading income may also be assessed on the income of basis periods which differ from tax years.
There is a potential problem if a non-trading firm starts to trade. Section 111(8)(b) of ICTA seems to require the basis periods for the non-trading income to be re-determined for all years since the partner joined the firm. That would pose considerable practical difficulties in the absence of rules about how to make the adjustments to assessments for earlier years.
Section 854(2)(b) of this Act makes it clear that the partner’s “notional business” (comprising a share of the non-trading income) does not start until the firm starts to trade: there is no question of looking back to the time when the partner joined the firm.
This change is in principle adverse to some taxpayers and favourable to others but it is expected to have no practical effect as it is in line with current practice.