Q: I have been working in a moderately successful partnership for a little over a year now. From the outset, we both agreed what salary we should both take out of the business and paid ourselves monthly after meeting our liabilities. However, since we submitted our tax returns, a potential snag has come to light. He is married, and claims his wife’s tax credits, while I separately dealt with some medical bills during the year. The upshot of this is that we both have different income tax liabilities to pay, with his being a few hundred less. When we set out, we originally intended to pay tax out of company funds, but he is arguing that this arrangement isn’t quite fair. I do see his point, but I’m now trying to figure out the best way to manage things. What’s your advice?
A: Thinking of partnerships almost as a limited company (with a little extra tax benefit) s is a common enough mistake – hence your original plan to pay tax out of ‘company funds’. In reality, you’re running a profit share, and you’re individually liable for tax on the profits that you take out of the venture (along with any other income). In that context, it’s good that you see your partner’s point of view.
There are three ways in which you can approach this. One option is for each of you to pay whatever you owe to Revenue back into the business’ account, and for the business to write a cheque for Revenue covering the total amount. Otherwise, you can both deal separately with Revenue to sort out payment details – or a payment plan if required. This would probably be the neatest way to do things.
If you do want to pay your income tax out of ‘company funds’, then your partner should get paid the difference between his liability and your own to be fair. Bear in mind that you will also have to account for this when you’re filing your tax return later this year. To be frank, your original plan is a bit messier than it should be.
This little problem underlines the importance of making advance preparation for your tax liability, and also having watertight agreements to cover every foreseeable issue. It’s good that you’re being reasonable and fair about a few hundred Euro, but business-busting rows have happened over less.
At DCA, we can advise partnerships on day-to-day matters such as their personal tax arrangements, along with key strategic issues such as partnership agreements and negotiating with Revenue. To set up a no-obligation initial meeting, simplycontact us.