Radical changes are to be made to the system of partnership taxation.

Under the existing rules, partnerships are assessed as a single entity for taxation purposes, with the tax payable calculated as a joint and several liability of the partners.

However, under self-assessment, each partner will be responsible for his or her own taxation on his or her share of partnership profit and there will be no joint liability.

The introduction of the current-year basis heralds the end of the current unsatisfactory system under which partnership profits are allocated in accordance with partners' profit-sharing ratios in the year of assessment.PARTNERS AS NOTIONAL SOLE TRADERSA partnership will be treated as a UK resident individual solely for the purpose of determining the amount of taxable profit.

In all other instances, a partnership will not be treated as a separate entity from its partners.ALLOCATION OF PROFITSThe measure of a partner's taxable profit will be his share of the adjusted results of the partnership for the period.

The only difference between the accounting profit on which drawings are based and the taxable profit will be that arising from the normal adjustment for tax purposes.

Each partner will be treated as if he or she were carrying on a separate business, and an incoming partner will be taxable on the opening-year basis rules in the year in which the partnership or the business commenced.

Each partner will have an overlap profit and period, determined by reference to the date of joining the partnership.DATE FOR NEW PROVISIONSNew provisions come into force from 1997/98 in respect of partnerships carrying on business on 5 April 1994.

Partnerships commencing after that date are subject to the new rules.

If there is a partnership change after 5 April 1994, and the partners do not elect for continuation, there will be a deemed cessation and commencement.

The new rules will apply on the commencement.INVESTMENT INCOMEInvestment income which is subject to deduction of tax at source, including dividends from companies, will be taxed on a strict fiscal-year basis.

However, investment income received gross will be assessed by reference to the partnership accounting period applicable for schedule D or case I or II purposes.

Whilst the income remains assessable under the appropriate schedule, such as schedule A or D, case III etc, it will be allocated to each partner as if it were income arising from a second deemed trade.

This will be segregated from the actual trading income and will continue as long as a partner remains in the partnership or until the partnership ceases to have any untaxed investment income.TRANSITIONAL PROVISIONSThe transitional rules applicable to an individual also apply to a partnership.

The partnership continues to be assessed for years up to and including 1996/97, with the averaging of profits in that year based on two years' profits.

From 1997/98, each partner is dealt with on an individual basis by reference to his share of the partnership profits or losses shown by the partnership statement.PARTNERSHIP CHANGESThere is no longer any necessity for a deemed partnership cessation on a change in partners, with the option to elect for a continuation.

The partnership only remains relevant in the sense that there is a single partnership set of accounts and computations, and a single partnership return and statement allocating the profits to the partners.

Continuation treatment is automatic where there is at least one continuing partner.

The opening year and cessation provisions only apply to those individuals who are joining or leaving the firm.Until the new rules come into effect -- in most cases on 6 April 1997 for existing businesses -- it will be necessary to continue to elect for a continuation after a partnership change.EQUITABLE ADJUSTMENTS/TAX RESERVESThe changed rules mean that equitable adjustment clauses will no longer be necessary, except in cases where there are prior charges which exceed the profits of the period.

The removal of joint and several liability means that there will no longer be a requirement for tax reserves to be made with a view to protecting the partners as a body.

However, a retention may still be desirable to ensure that each partner will be in position to discharge his or her own tax liabilities in due course, without causing embarrassment to fellow partners.

There will also be no need for a partner to indemnify the other partners jointly and separately for his or her proportion of any tax payable by the partnership.

On the retirement of a partner, any provision that the continuing partners will take over all the partnership liabilities will not extend to the tax liability of the retiring partner.FINANCIAL REPORTING/RECORD KEEPINGWith the introduction of rigid filing deadlines, each partner should be in receipt of the necessary financial information to enable the filing of individual returns on a timely basis.

Reporting requirements are imposed on the partnership relating to the partnership return and the partnership statement.

These must be complied with to avoid penalties and ought to be addressed well in advance.It is imperative that proper accountbooks are kept by the partnership showing all receipts and payments.

It is advisable for each partner to appoint a precedent partner with the specific authority to make the partnership return and partnership statement.