The “Basis Period Reform” is something that has been on the horizon for several years now but with the 2023/24 tax year being the transitional year, actions now need to start being taken. From the 2024/25 tax year, all unincorporated businesses will be required to report their business profits arising on a twelve-month tax year basis, regardless of their accounting period year-end. Consequently, any unincorporated businesses with a year end other than 31 March / 5 April have a decision to make – do I change my year end to conform with the tax year end or do I carry on as I am?
The transitional year
Whether the year end is changed to conform with the tax year or not, any unincorporated business with a year end away from the tax year end will be impacted in the transitional year. Put simply, during the transitional year, the period on which the taxable profits are calculated will be longer as it will take into account the profits of the accounting period ending in the 2023/24 tax year, plus the profits generated up to 5 April 2024. The additional profits from the current year-end to 5 April 2024 are referred to as the “transition profits”.
The addition of the “transition profits” on top of the usual twelve month period is likely to result in higher than normal profits for the 2023/24 tax year. In recognition of this, HM Revenue & Customs have outlined “spreading relief” which will enable taxpayers to spread the transition profits across five years. HM Revenue & Customs will, by default, spread the transition profits equally over five years however there is the option to elect for an additional amount of the transition profits to be treated as arising in a tax year. This election is something we will consider and discuss with you each year.
Establishing the “transition profits” will therefore be a critical part of the process and this is where businesses will need to consider if a change of year end is required or not. For example, if a business currently has a year-end of 31 December, they have two options:
- Prepare accounts to 31 December 2023 as usual and a further set to 31 December 2024. The three month period to the end of the tax year would then be time apportioned from the 2024 accounts to form the “transitional profits”. Going forward, nine months from one set of accounts and three months from the next would form the profits for the tax return.
- Prepare a long period of accounts to 5 April 2024 and again time apportion to establish the profits for the three months from 31 December to the end of the tax year. Going forward, the year end would align with the tax year and the profits would flow onto the tax return.
Considerations for changing the year end
Transparency
An accounting year end which aligns with the tax year end will provide greater transparency compared with apportioning profits from two separate sets of accounts. Projections will, however, be required to allow for pre-year-end tax planning considerations.
Timing of Capital Expenditure
Capital allowances are claimable with reference to the date the expenditure is incurred. Where the accounting year aligns with the tax year, there is reassurance that capital expenditure within the accounting year will fall into the corresponding tax year. Where the accounting year differs, care will need to be taken when planning capital expenditure as consideration will need to be given to the tax year end, not just the accounting year end.
Costs
Where accounting periods do not align with the tax year, there will be additional calculations required to apportion profits from two sets of accounts and combine them, together with capital expenditure, to produce the taxable profits for the tax year. These additional calculations will incur additional compliance costs.
Timing
The tax return deadline for digital submissions is unchanged from 31 January. Where apportioning profits is required, there is likely to be very little time between the year end and the filing deadline which will result in estimates being needed. In the 31 December example above, there would only be one month from 31 December to 31 January to compile the accounts and obtain the three months of profits needed. In this situation, it is likely that estimates would be used which would need to be finalised at a later date. If the estimates are understated, interest could be payable to HM Revenue & Customs.
Business needs
Arguably the most important consideration is the needs of the business. If aligning the accounting period with the tax year will cause unmanageable practical issues, then this in itself could be reason alone to keep the year-end which is proven to fit with the business model.
There will not be a ‘one size fits all’ solution for all businesses in complying with the new basis period reform. Your usual Ellacotts contact will be pleased to talk through the practicalities for you and your business to ensure that the transition to the new rules is as seamless as possible for you.
Please contact Ellacotts if you wish to discuss this article or if you have a query. Contact us on 01295 250401 or email solutions@ellacotts.co.uk. You can also contact us here with your query.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
