Consultation in respect of basis periods

Following an initial on basis periods on 20 July 2021, the government confirmed in their Autumn Budget that basis period reform would be going ahead from April 2024, one year later than originally planned.

It may be that this could have cash flow implications for your businesses and therefore this needs to be assessed and planned for.

The legislation proposes to simplify how businesses are taxed in their early years, by removing the “current-year basis”, and replacing it with a “tax-year basis”. This would impact on all individuals, partnerships, and trusts with a non-March year-end accounting period for any work as a proprietor of a business, from 2024/25. The proposition is that there would be a transitional year in 2023/24.

Whilst over-time this is expected to be tax neutral for HMRC, and it’s seeming complexity allows it to fall under the radar of main stream media, ultimately it is likely to be a huge earner in the short term raising an estimated c. £1.7bn in additional tax revenues over the next 5 years.

The impact is as follows:

  • All profits will be taxed in the tax year in which they are made. This means that if the accounting year-end is 30 September 2024, the 2024/25 tax returns would be based on 6 months of the period ending on 30 September 2024 and 6 months of the period ending on 30 September 2025.
  • If final accounts for this second period were not available before 31 January, an estimated return would need to be completed and submitted to HMRC before this date, and then amended after this date.
  • In 2023/24 (the transition year) a long period would be taxed from the end of the previous accounting period to 31 March 2024. All existing overlap relief would then be claimed against this, in order to reduce the profits to those of a 12-month period. For example, if the year-end was 30 June, the period taxed in 2023/24 would be 1 July 2022 – 31 March 2024. All overlap relief brought forward would then be claimed.
  • If this gave rise to additional profits, i.e. if overlap were lower than the additional profits taxed in the year, this additional profit could be spread over 5 years.

It is important to keep the following in mind:

  • businesses may need to finalise annual accounts and tax computations earlier than usual, which may incur additional costs;
  • while there is currently no requirement for businesses to adopt an accounting date aligned with the tax year, many businesses will likely choose to adopt a 31 March year end in the transition year 2023/24;
  • there will likely be a cashflow impact as a result of extra tax in the transition year and extra costs of complying with the new rules and accelerating accounts preparation;
  • for retiring partners, these changes could alter the optimal date for retirement, as well as accelerate transition period profits in the final tax year.

Please get in touch with us if you would like to discuss the impact on you.

For more information about our services and how we can help your business please get in touch.
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