B7.503 Allocation of partnership profits and losses—mixture of notional profits and losses
The pre-determined sharing arrangements within a partnership may mean that a partnership result for an accounting period is allocated as a profit to some partners but as losses to others This can occur (as illustrated in Example 2 at B7.502) where the total profits of the partnership are less than certain partners' prior shares of profit.
While this may be a commercially acceptable result from the accounts viewpoint – requiring partners with losses to contribute additional funds to the partnership to cover their position – the effect cannot be mirrored within the tax allocations.
It is not possible, from the same source of income, for some partners to have taxable income and for others to have tax-relievable losses. When this would otherwise occur and the result overall is a taxable profit, the allocations of profit are scaled down in proportion to each other to equal the aggregate profit, and the losses are ignored altogether1.
Essentially this means that a partner's loss as determined under the basic rules is, in effect, reallocated to the other partners to reduce their shares