On 27 October, we are expecting the Chancellor to announce whether or not the proposed ‘basis period reform’ for unincorporated businesses will go ahead in 2024/25. The reforms would mean, regardless of a business’ accounting year end, that the calculation of taxable profits would be based on those profits arising in the tax year. Following a short consultation period and with legislation already in draft, it is felt that this change is likely to be confirmed on 27 October.
The reason for the proposed change is to create a ‘simpler’ tax system, particularly ahead of the introduction of ‘Making Tax Digital’ for Income Tax, which is now expected to be in place from April 2024. The reforms, however, may not make life simple for a lot of businesses.
Will this affect you? If your business operates through a company then no, however partnerships, sole traders, and trusts or estates with trading income are all within scope. If these unincorporated businesses have a year end other than 31 March or 5 April, there will be an impact on how the annual results are taxed.
The current basis for calculating taxable profits for a tax year looks at the business’s set of accounts ending in that tax year. For example, profits for the year to 30 September 2021 will be taxed in the 2021/22 tax year. Many farming businesses have a 30 September or 31 December year end - let’s look at how these reforms will affect them.
30 September Year End
Accounts for the year to 30 September 2024 would ordinarily form the basis for the tax due in 2024/25. Under the basis period reform proposals, however, the assessable profits in 2024/25 will be based on the last six months of the September 2024 accounts and the first six months of the September 2025 accounts. The tax return(s) would need submitting by 31 January 2026, allowing only four months from the 2025 year end to prepare and agree annual accounts. Alternatively, an estimate can be made for the final period before being amended later. Estimating half of the results for a tax year could produce results that are far from the final position, and lead to significant overpayments or underpayments of tax. HMRC have acknowledged there will be an increased admin burden on a ‘small’ number of businesses.
31 December Year End
Currently the 31 December 2024 annual accounts would be wholly assessable in the 2024/25 tax year. The tax return submission deadline is 31 January 2026, allowing 13 months to prepare the accounts and associated tax computations. Under the proposed new system, the profits assessable in 2024/25 will be based on 9/12th of the result for the year to 31 December 2024 and 3/12th of the result for the year ended 31 December 2025. This is only one month prior to the 31 January 2026 filing deadline. Producing accurate annual accounts in just one month, at a time when many advisors are at their busiest, would be challenging.
HMRC has recognised this difficulty. They advise using provisional figures for the final months of the tax year to estimate the tax due and then, once final figures are known, submitting an amended return. Of course, this approach duplicates your accountant’s work and increases fees to your business as a result. It may therefore be appropriate to consider whether a change of year end would reduce the future administrative burden. Some businesses with contracting agreements for example may find a change of year end difficult.
Farming businesses with accounting periods ending 31 March are not affected by these changes. The advantages currently of a non-31 March year end include ample time to plan for tax cashflows, and easier in year tax planning. Pension contributions, for example, can be made when taxable profits are known. If the proposed changes go ahead, this planning becomes more difficult, as an estimate of the trading result for the last few months of the tax year may be necessary.
The lead up to these proposals included a short six-week consultation period, which has so far left many questions unanswered. Industry professionals have asked HMRC how the proposed reforms will interact with other elements of our tax system including:
- Farmer’s averaging;
- The use of losses;
- Capital allowances;
- The High Income Child Benefit Charge;
- Pension contributions; and
- Student loan repayments.
With the Autumn Budget almost upon us, we may soon understand more about how the proposed reforms will interact with these other areas of the tax system.
If you would like to discuss the matter further please contact… at Smith & Williamson or alternatively please get in touch using the following details….
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2021/22.
CLA South West Member Monthly Partner
Smith & Williamson are CLA South West Member Monthly Partners. The advice contained within this article is supplied by Smith & Williamson. The CLA may be able to assist you with advice in this subject area, please contact your regional office.
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