Cash accounting, partnership set up, deferred income

Hello, I have been preparing the cash-basis sole trader accounts for a niece for 6 years. Straightforward so far. She intends to form a partnership with effect from April 24/25 tax year. A seamless change using same company name, invoicing system, business bank account. Cash Basis continuing. My problem: In preparing the final 23/24 Sole Trader accounts, I found that in the last few days of the tax year, she had received income of £7k via a web-based ticketing office for an event planned for May 24 to be run by the new Partnership. No expenses for this event have been incurred. Under Accrual Accounting, these receipts would clearly be held on balance sheet as Deferred Income to be matched with the expenses arising in 2024. Under Cash Basis rules, as I understand it, these receipts should be reported as income and profit in the 23/24 tax year. This £7k income will materially distort the income (+14%) and net profit (+33%) for the year. Furthermore, the first year partnership accounts in 24/25 will show a loss for this event because the income has already been reported. Taxation will also be an issue because the Sole Trader will be taxed on the revenue in January 25 and the partnership will receive the tax refund in January 26. BIM70066 discusses transition adjustments for Cash Basis but I can find nothing similar to my problem. Is it acceptable as a Transition Adjustment from Sole Trader to Partnership not to report these receipts in the 23/24 sole trader accounts but to include them instead in the 24/24 Partnership Accounts where they belong? Thank you

Hi PJS,
 As you are not changing from Cash Basis to Accruals Basis the Transitional rules and guidance referred too would not apply.
Please refer to PM163090 & PM163160 which covers the continuance of a notional trade, which appears to apply in this case.
Whilst we understand the impact outlined in your query, we would suggest that it would be between the individual members of the partnership to take this event into consideration when agreeing the shares of profit/loss arising in the first years accounts of the partnership.
We cannot find anything else that would suggest a different process for declaring the income received by the sole trader under the Cash Basis regime.
PM163090 - Commencement and cessation
Thank you. 

      

 

Hello, Thank you for your prompt reply and for pointing me towards the Partnership Manual, which I hadn’t discovered and has been very informative. I understand your point about adjusting the partnership profit share. The complication is that the adjustment needs to transfer part of the tax rebate in the 2nd year between the 2 partners (who have quite different tax profiles) and I prefer not to be involved at this level, if possible. May I please ask a follow up question: Since the 2 individuals have been working closely together for the last few years as arms-length, Sole Traders (ie invoicing for services rendered), the proposed start date of 5th April 2024 for the Partnership was chosen simply for convenience. I’m wondering if my timing problem can be overcome by choosing an earlier date for the Partnership to begin. Would it be within HMRC rules to: Sole Trader Business. - Cease trading on 5th March 2024 - Submit SA100 for 11 month period for 23/24 New Partnership Business - Register Partnership for the tax year starting 5th April 2023 (by Oct 24) - Commence partnership trading on 6th March 2024 (which will catch all the bank receipts at year end which were intended for the partnership) - Submit SA800 for 1 month for period 12, 23/24. (would I also need to submit a nil return for the first 11 months?) - The cash received has already been transferred to the partnership account (and largely spent on event preparations) If acceptable, this would appear to ensure that the income is: 1) declared in the correct year (in a cash accounting world), 2) the individuals are taxed (and refunded the following year) properly without my intervention, and 3) the management accounts for the original and new business are properly shown. Thank You

Hi,

If the sole trader business ceased on 5 March 2024 and the partnership commenced 6 March 2024, then the each of the individual's Self Assessment tax return, SA100, would include supplementary pages SA103, self employment, for the sole trader up to 5 March and SA104, partnership, for their part of the partnership from 6 March to 5 April.  

The nominated partner would also be required to submit the SA800, partnerhip, tax return. The SA800 will show the overall partnerhsip proft, and, or loss and how the proft, and, or loss is attributed to each of the partners.  

The forms SA104 will be submitted by each partner, showing their profit, and, or loss, this should match the figures submitted for them on the SA800.

Thank you.