Basis period reform... what are my options?

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What are the options open to practices?

Businesses are not required to amend their accounting period to 31st March.  However, if it is not permanently changed to align with the tax year end, this will mean provisional figures will need to be submitted each year to HMRC with a further submission at a later date.  This brings greater work and greater costs.

Moving the Accounts year-end to align with the tax year also brings simplicity for all.  For some GPs it can be complex to understand a non-march year-end in terms of personal expenses information versus tax year-end information, making the process much clearer.

For GP practices it would be sensible to move to accounts year-end permanently, however for large international partnerships this is not something they can perhaps change.

When should my practice be prepared for this change?

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.

Example timeline: For a June year end.

It is extremely important to stick to a timeline set by your Accountant.  This is because essentially all practices will require accounts to 31st March 2024 whereas currently practice year ends vary and the work for your Accountant is technically more spread throughout the year.

What will happen with Overlap relief?

Overlap profits must be offset against the profits of the 2023/24 tax year.  There is no facility to defer this overlap relief.

Do the new rules affect partnerships and how?

The new rules affect all unincorporated businesses and individuals who do not currently prepare their accounts to 31st March (or 5th April) in line with the tax year (e.g., Practice Accounts year end of 30th June 2023)

What are the ‘Transitional profits’ and how is this spread?

This is an individual’s share of additional profits that take the practice up to 31st March 2024, with less overlap relief where relevant.  These profits are ‘spread’ over the next 5 years from January 2025 and taxed at the tax rate applicable in that year.

It is understood the transitional profits will be treated as a separate one-off taxable income after the assessment of income to determine entitlement to the personal allowance.

I.e., the personal allowance is not lost in cases where the person is usually entitled.

Do I have to spread the profits over the 5 years?

No, there may be circumstances where some clients don’t wish to spread and have the funds to pay the additional tax.  With the uncertain financial world, we find ourselves in, tax rates could increase over the next 5 years, so some may reduce this burden by settling this in year one. 

How do these rules affect retiring partners?

Retiring partners would lose the ‘spreading’ facility and all remaining profits would become taxable in the year of retirement under the normal rules.

Our Practice has retiring GPs and the practice pay the tax – what should we do?

Speak to your Accountant and ensure balances remain in the practice to cover the tax.  Your Accountant should be looking at the capital accounts of the retiring partners anyway and this should be considered.

How does this reform fit in with Making Tax Digital?

One of the reasons HMRC are making this change is because Making Tax Digital will be enforced from 6th April 2026 which requires quarterly submissions of tax records.

Making Tax Digital is a key part of the government's Tax Administration strategy.

Your practice should set up a streamlined bookkeeping system before this comes into effect, or alternatively, consider outsourcing this to a provider.

How will this affect Superannuation?

Currently, the rules for the calculation of Pensionable Earnings and therefore superannuation charges follow the tax treatment. It remains unclear if the superannuation guidance will change to mirror this change in tax legislation and if superannuation on ‘additional profits’ will also be ‘spread’

How will this affect My Annual Allowance position?

A rise in pensionable pay may in turn result in increased pension growth which could then lead to an annual allowance tax charge.  There has not been any information released as to whether there could be a compensatory scheme to alleviate this additional tax burden.

Will the change in tax thresholds impact me?

The change in tax brackets for the additional rate of 45% (Scotland 47%) from £150,000 to £125,140 will have an impact generally.  But we could see more clients affected because of the transitional profits.

What can I do now in advance of this change?

If you are concerned speak to your Accountant about providing you with tax estimates.

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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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