April 14, 2022
Basis period reform
The key reforms involve moving from the ‘current year’ basis to a ‘tax year’ basis, meaning that business profits will be calculated for the tax year rather than for the period of account (i.e. their accounting year) ending in the tax year. This would align the treatment of trading income with non-trading income. The move to this new tax year basis will involve a transitional (catch-up) year for many sole traders and partnerships that do not use 5 April or 31 March as their accounting date. This will advance tax liabilities for many.
When does the reform takes place?
This reform is scheduled to take place for the 2024/25 tax year with 2023/24 being a transition year to bridge the periods between existing year ends and then new basis periods.
2023/24 Tax Year – Transitional Year
For those businesses without a March year end, they will have an assessable period of over 12 months and so there could be an additional tax charge arising. The additional profits can be spread over the five years starting 2023/24.
2024/25 Tax Year – First Year of New Basis Period
Businesses will be taxed on a tax year basis. Those without a March Year end will apportion the profit or loss for the respective periods to the tax year on a day count basis. Alternative apportionment methods can be used but these need to be reasonable and be applied consistently. In addition to the taxable profit or loss for the tax year, a portion of any transition period “additional” profits will be taxable.
Benefits of basis period reform
How does basis period reform impact partnership?
In the short term, while the rules may simplify certain technical and practical matters, partnership that do not make their accounts up to 31 March/5 April will need to consider the impact of the changes on their cash flow: particularly for the transitional year 2023/24 which could see partners paying tax on significantly increased amounts of profit. The impacts will continue to be felt going forward, as the changes close the timing gap between profits accruing and being brought into charge.
These changes may be particularly challenging for large partnership with complex financial and tax affairs, and the impacts will need to be carefully considered and prepared for ahead of the transitional year. The one-year deferral is welcome, but businesses would be well advised to make sure that they make the best use of the extra time available.
In the longer term, the reforms will remove some of the cashflow advantages of operating through a partnership model and make it harder for partnerships to finance their working capital.
The ongoing requirement to apportion and/or estimate profits of consecutive accounting periods may lead many businesses to consider changing their accounting date to align with the tax year. Again, this would require careful consideration, particularly for larger partnerships with complex accounting processes, and other factors would need to be taken into account.
Our expert healthcare team can give you proactive advice and help you to analyse the impact that the reforms will have on your business, prepare financial projections, and consider any remedial action that may be appropriate.