Income tax basis period reform – HMRC guidance
HMRC publish guidance on the Basis Period Reforms, for individuals, partnerships, trusts, and others subject to Income Tax on trading income.
HMRC publish guidance on the Basis Period Reforms, for individuals, partnerships, trusts,
From the 2024/25 tax year, all business profits subject to income tax, will be assessed on the profits arising in the tax year, no matter when their accounts are drawn up. Currently businesses are taxed on the profits ending in the tax year, for example, accounts drawn up to 30 April 2021 are taxed in the 2021/22 tax year. 2023/24 will be a transitional year moving from the old to the new basis. HMRC guidance has now been published following Royal Assent of Finance Act 2022. It includes 25 examples of possible calculations and explains the concepts of transition profits and the tax thereon, spreading provisions, the rules when there are losses (including where overlap profits exceed profits) and for those with a ‘notional business’ (a source of untaxed investment income which is currently taxed on the same basis as the main trade).
The original proposals were previously outlined in earlier Tax Matters Digest articles. In summary, the 2023/24 transitional year will be on the following basis for ongoing businesses:
- The ‘standard’ part – the normal accounting period; plus
- The ‘transition’ part – from the end of the ‘standard’ part to 5 April 2024; less
- Overlap profits brought forward.The main points from the HMRC guidance, are as follows:
- Businesses with a 31 March year-end will be treated as being the same as 5 April unless an election is otherwise made;
- Transitional profits – the ‘transition’ part less overlap, will be spread equally over five years and starting with 2023/24;
- An election can be made to accelerate all or part of these transition profits;
- If the business permanently ceases to trade before the start of the fifth year, (or when a partner resigns from a partnership), the balance of the profits will be treated as arising in the tax year of cessation;
- Where overlap profits exceed the ‘transition’ part, the resulting loss can be treated as a ‘terminal’ loss – set against the profits of the same trade for the previous three tax years, latest first;
- Where the calculation produces a profit, tax is calculated as follows:
- A - ignoring the transitional part; and
- B - including the transitional part
- The difference between B and A is the transitional tax and added to the tax liability of the relevant tax year. This is to ensure that allowances and means tested benefits are not impacted by the transitional rules; and
- Where the business has a notional trade, the assessable amount in 2023/24 is calculated in the same way as trading income. If the related overlap profits exceed the sum of the total ‘standard’ and ‘transition’ parts, any excess can be set against trading income.
The reforms will accelerate tax payments for many businesses. It may also push individuals into higher tax rate bands particularly where the business ceases before the fifth year.
Going forward, businesses who do not currently draw accounts to the end of the tax year or 31 March, will have a much shorter period to finalise their figures. For example, those drawing accounts to 30 April currently have 22 months before the self-assessment filing deadline whereas in future, they will have 10 months.
What actions can affect taxpayers consider?
Now that the final legislation and guidance has been published, taxpayers should consider taking expert specialist advice to help ensure they:
- Understand the real impact of these changes on their business;
- Manage the immediate cash-flow impact of the changes;
- Consider changing their accounting date to 31 March to simplify the calculation of assessable profits from 2024/25; and
- Large partnerships who may not be in a position to change their accounting date, should consider the processes which need to be in place to file provisional and then final tax returns for each period. HMRC are still considering how to deal with these practical issues and the potential impact on penalties/interest.