Who does the Basis Period Reform affect?
Self-employed individuals, partners in partnerships, or LLPs.
How will this affect you?
Income tax and National Insurance on your profits between your usual year-end and 31 March will be brought forward. However, there are transitional rules which relieve the tax pressure this may create.
Basis Period Reform – What are the options?
Option 1 – You may decide to change your year-end. This you can do early and prepare accounts up to 31 March 2023 or alternatively change it to 31 March 2024. If you do choose to go early to 2023, you may miss out on transitional relief.
Option 2 – You may retain your usual accounting date and bring in the profits earned since the year end up to 31 March on an apportioned basis. For example, using a 30 September year-end, in 2023-24 the self-assessment return for that year will require not only the 30 September 2023 accounts but also the 30 September 2024 accounts to be completed in order to get the correct apportioned profits to file the return by 31 January 2025. Alternatively, the results can be estimated, though an amended Return will need to be filed
when the actual profits are known for that period. This can lead to interest on any underpaid tax and potential penalties if there has been an undue delay or significant underestimation.
Transitional rules
Rules are being brought in to ensure that there is not a significant tax impact on businesses currently with a year-end which is not 31 March or 5 April.
These transitional rules apply to 2023-24 and allow the spreading of any additional profits over five years starting with 2023-24.
For example, a business changing its year-end to 31 March 2024 from a 30 September 2023 year-end can spread the additional profits falling with the period 1 October 2023 to 31 March 2024 over 5 years from 2024-25 onwards. However, taxpayers can also elect to recognise more of these transitional profits earlier if it is tax efficient to do so.
The transitional arrangements do not apply if you change your year-end to 31 March 2023.
Overlap profits
If you have a year-end that is not 31 March or 5 April, you may have brought forward overlap profits. These are profits that have been effectively taxed twice due to HMRC’s rules on taxing opening years of businesses.
If you have overlap profits, these will be relieved against your profits in the transitional year.
What should I be doing now?
Many businesses will already be part way through their transitional accounting period and should be considering the following:
• How these changes will impact on their cashflow and whether this will require additional funding, particularly in relation to the tax payable in January 2025 (which is when any potentially significant ‘catch up’ payment is likely to be).
• The merits of adopting an accounting date of 31 March or 5 April going forward to align with the tax year and, most importantly, the appropriate timing of such a change. Accurate profit forecasts will be crucial when it comes to decisions on the timing of any accounting period changes.
• The timing of accounting and tax computation work – does this need to be brought forward to avoid estimates which would then only have to be amended at a later date (thus adding to the cost)?
• Whether the current structure of the business is still appropriate in light of these changes. If you wish to know more about this or would like to arrange a free initial meeting to discuss how we can help you in more detail, please contact Ben Maughan on 0113 204 4217 or email ben.maughan@kirknewsholme.co.uk
