Basis period reform – how to keep it simple

TaxTalk - December 2023

read timeRead time: 18 mins

We are already in transition towards a fundamental change in the way the self-employed and partnerships calculate their taxable profits. How should you plan, and what should you be doing now?

From 2024/25, all self-employed individuals and members of partnerships will be taxed on the profits generated during the tax year from 6 April to 5 April. This applies regardless of the year-end to which the business prepares its accounts.

Businesses that are unable to change their accounting date to 5 April, for commercial or other reasons, will be left having to apportion profits from two accounting periods to arrive at profits for the tax year. This will likely mean that individual members have to file tax returns on provisional figures and refile the return the following year. It is at least reassuring, though, that a year end of 31 March will be treated as 5 April, with no need to adjust for the 5 days in between.

While the changes may be unwelcome to businesses, the announcement does provide the opportunity to make plans in advance. There are various complexities, but it’s still not too late to deal with them, if you haven’t already done so.

Partnerships should consider the following areas carefully:

1. Accounting year: to change or not to change?

Those businesses without a 5 April (or 31 March) year end must decide whether to change to 5 April (or 31 March) or keep their existing year end.

For example, in a partnership with a 31 December year end, whether or not it changes to coincide with the tax year, the members will need to file as follows:

  • For 2023/24 tax year, the profit share for the 15 months to 5 April 2024 (or 31 March 2024). See details below for transitional year arrangements.
  • For 2024/25 tax year, the profit share for the year ended 5 April 2025.
  • For 2025/26 tax year, the profit share for the year ended 5 April 2026.

2. Partnerships not wishing to change their accounting year

When a partnership has a different accounting year end to the tax year, it will have to apportion the results for the two accounting periods that fall within the tax year to arrive at the figures that cover the year 6 April to 5 April.

i.e. for the tax year 2024/25, members of a partnership with a December year end must report their financial figures as follows:

  • 9/12 of figures reported in the Financial Statements for the year ended 31 December 2024 &
  • 3/12 of figures reported in the Financial Statements for the year ended 31 December 2025

The default is that apportionment would generally be made pro rata of the number of days in each relevant period.

3. Apportionment of bonus and performance fee

There may be some cases, especially for hedge fund businesses, where the members’ bonuses and performance fees for the year can only be determined at the year end. One solution might be to recognise the performance fee for the three-month period from 1st January to 5 April at the year end, and incorporate this in the next year’s partnership return with a disclosure note to explain the basis of the apportionment, and to notify HMRC that it is a more accurate measure of the profit for the period.

4. Plan for the transitional (catch-up) year

The current year, 2023/24, is the transitional year. Members must report their results for the period from the date of the last accounting period to 5 April 2024. So, for a partnership with a 31 December year end, the members should report their profit share for the 15-month period ended 5 April (or 31 March) 2024.

There are rules for the transitional period (1 January to 5 April 2024). A deduction is given for the members’ overlap profit brought forward, and the net transitional profit is spread over a period of up to five years. We advise that partnerships plan for this in advance and ensure that the information is available for reporting well before 31 January 2025. This includes establishing and evidencing the overlap profits for the individual members.

5. Partners tax reserve forecasting

Many partnerships have prepared high-level estimates of their members accelerated tax liabilities. We recommend these calculations are now refined, bearing in mind individual circumstances which could significantly alter their cash flow positions. It’s important to take into account increasing or falling future profit shares, and the extent of tax reserves, when deciding whether to leave transitional profits spread over the five years, or to accelerate them.

6. Communication with members

For partnerships where the transitional rule applies, the members’ taxable profit in this year is likely to be higher than in previous tax years. This means their tax liabilities will be higher too. Those funding their tax liabilities themselves in this year must understand the impact of accelerated tax payments and make sure they have the funds to pay their tax. Regular communication with members, or a short seminar for those affected, may help to reduce their queries and provide them with more certainty.

Planning and advice

To ease stress and time pressures, set a clear timetable for providing relevant members with profit estimates for the tax years, and estimate a date for the subsequent amendment of the return where apportionment applies, as in point 2 above.

We can help

PKF Littlejohn can provide FAQs and organise seminars for members. If you would like to discuss how we can help your business, please contact Tilak Lamsal or Stephen Kenny.