Basis Period Reform... how will this impact me?

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Basis Period Reform is new legislation from HMRC which essentially aligns the business year end with the tax year end and comes into play from the 2023/24 tax year which will be recognised as the ‘Transitional year’.

Two sets of accounts will be recommended in the transitional period – one set drawn to your usual accounting date and a second set which runs to 31 March 2024. Separate accounts are recommended in order to ascertain the amount of additional profit arising from these changes.  (If you have a year end after September 2023 then an Extended set of Accounts may be more suitable than an Additional set).

The additional profits resulting from the Basis Period Reform will be deemed as ‘Transitional profits’ and they will be ‘spread’ over the next five years (or sooner if you were to retire in this five year period falling under normal retirement rules).

The Transitional profit in this example is therefore £50,000 which will be spread over five years for tax and superannuation purposes.

The Assessable profit for 2023/24 under Basis Period Reform is, therefore, £150,000 PLUS £10,000.

The tax payable on these additional profits is due in January 2025 and annually thereafter.  Payments on account are not affected by this additional tax.

A rise in pensionable pay for 2023/24 may in turn result in increased pension growth which could result in breaching the Annual Allowance threshold. However, as this threshold has currently increased to £60,000 (unless tapered), then we don’t foresee that as significant an issue now. Please be careful to speak to your Advisor on this.  At this time there has been no further information released on the mechanics of this or as to whether some compensatory scheme may be available to alleviate this additional tax burden.

After the transitional period there is no requirement to change the practice year end, however if it is not changed this means estimated figures being submitted to HMRC every year, with a further submission at a later date.  This leads to greater work for the practice and the Accountants and would therefore result in higher costs.  It is a practice decision; however, we would suggest our practices change their year-end in line with the tax year and this new legislation.

Furthermore, moving the Accounts year end to align with the tax year also brings simplicity for all.  For some GP’s it can be complex to understand a non-march year end in terms of personal expenses information versus tax year end information, this way the process will be now simpler.

It is imperative to keep your practice financial records up to date as this information will be required sooner than normal for your Accountant to prepare the relevant period of Accounts up to 31^st March 2024.

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If you have any questions relating to Basis Period Reform and how we can help, please don't hesitate to get in touch with our team.

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*Overlap profits are profits from when either you joined the practice or dating back to when Self Assessment first came into force.  They are essentially profits that have been taxed twice and get relieved when you leave the practice or in this case when the basis period is changing.  Overlap profits must be offset against the profits of the 2023/24 tax year, there is no facility to defer this overlap relief.