Follow up to the basis period reform

The bad news is that HMRC does seem intent on making these changes happen, however, the good news is that they have been pushed back by a year, with 2024/25 being the first full year under the new rules, and 2023/24 being the transitional year.

As a recap, the basis of assessment for all self-employed individuals and partners will switch from the current year basis to the tax year basis from 6 April 2024. This change will only affect unincorporated businesses that do not currently prepare their accounts to 31 March, 5 April, or a date in between, and they will find their taxable income is accelerated. Under the tax year basis, all unincorporated businesses will be taxed on the profits arising in the tax year, rather than the profits that are made in the accounting period that ends in that tax year.

The transitional year will now be 2023/24, which could mean higher tax liabilities for some individuals as they will be taxed on more than 12 months of profits. Overlap profits can reduce assessable profits in the transitional year, and if this does not eliminate the additional profits taxed in 2023/24 we understand measures will be available to automatically spread the additional profit from the transitional year over five years (although at the time of writing this point has to be confirmed).

So, what does this actually mean:

Example - Dr. Smith (this could be a locum, consultant, or GP Partner) makes a profit of £150,000 per year and draws up accounts to 30 September. In 2023/24 they will be taxed on:   

Immediate Issues:

• An additional profit of £35,000 is being assessed to tax, subject to rules for spreading those additional profits
• What level of profit is relevant for superannuation contributions (the taxpayer hasn’t earned any more in the tax year)?
• Will there be any changes to pension annual allowance rules?
• Will there be any compensation if a taxpayer loses their personal allowance as a result of the transitional year rules?

Other issues:

If businesses do not change their accounting period to align with the tax year-end, they will have to apportion profits from two accounting periods to complete their tax return. This means submitting a tax return based initially on estimated profits, and then revising this once the actual profits are known, creating additional work.

The change to the tax year basis is seen as critical to the success of Making Tax Digital (MTD), as without it the quarterly reporting would not provide a meaningful estimation of the tax due by the business for the year, however, it creates unintended consequences for other areas of the GP tax landscape.

Key points to remember – 1) if your current business year-end falls on or between 31 March - 5 April or if you run a limited company, these new rules will not affect you; 2) even if you are affected there is no immediate action to be taken, the earliest point in time you might see an increase in tax liabilities is January 2025.

Our team will continue to provide tax estimates so that clients are always aware of these well in advance.

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