Tax Talk: Basis period reforms – are you ready?
We look at the best ways to save tax, particularly in partnerships, summarise the key changes in partnership reporting, and consider the pros and cons of new accounting reference dates.
With taxes there are always winners and losers, especially in this fast-changing taxation world. The higher rate tax band is to be lowered and the new tax year basis of reporting kicks in from April this year. So if you can keep up with it all, you’re a winner.
The key reform is to move from the ‘current year’ basis to a ‘tax year’ basis. This means business profits will be calculated on a tax year basis rather than using the accounting year. This aligns trading income reporting with investment income reporting.
The move will involve a transitional (catch-up) year for many sole traders and partnerships that do not use 5 April or 31 March as their accounting date. This will advance tax liabilities for many. So it’s vital to plan ahead to make the transitional year more tax efficient.
New tax year basis
For practical purposes, the new rules allow the periods to be apportioned by reference to months, if reasonable to do so and should be applied consistently. Businesses drawing their accounts with a non-tax year end must apportion the profits or losses across the period and adjust their results to the tax year basis.
For any periods with accounts not yet finalised, this apportionment will require estimation, then finalisation and re-submission. For example, a partnership with a December year end does not wish to change its partnership accounting reference date. So, for its partnership return for 2024/25 tax year, it must use the following basis of reporting:
- 9/12 months’ profits to the year ended 31 December 2024 and;
- 3/12 months of estimated profits for the year ended 31 December 2025. HMRC allows an estimated profit to be used for the year ended 31 December 2025, assuming the December 2025 figures won’t be finalised and are not ready to use for reporting by 31 January 2026. HMRC approves this method, provided the partnership return is amended as soon as the final figures become available.
Advantages over current year reporting
From April 2024, it will no longer be necessary for applying the special basis period rules for the year in which a partner joins or leaves a partnership, or where there is a change of accounting date. The current rules which can be very complex to deal with are the opening year, overlap profit calculation and cessation rules. Instead, the relevant reporting period will simply correspond to tax years (ending 31 March, if not 5 April). The ‘transitional year 2023/24, utilises all the overlap profit brought forward. This will eliminate ‘overlap’ profits and the need for their relief in the future years.
The tax year of transition will be 2023/2024, beginning on 6 April. In 2023/24, partnerships with continuing business are taxable on their profits on the current year basis (i.e. for the 12 months to their accounting date ending in 2023/24), plus the period up to the end of the tax year, ending 5 April (or 31 March for simple apportionment).
Depending on the partnership’s accounting date, this could bring almost two years’ profits into charge in the year. Businesses with a 30 April year-end are particularly impacted, with almost 23 months of profit taxable in this year. Given this could lead to a much higher tax bill, the transitional rules allow the excess profit to be spread over a period of five tax years to mitigate cashflow impacts. Individuals, however, can elect to be taxed on the transitional increased profit in any way they choose over the five years, including being taxed on the full amount in 2023/24 if desired
Alternative to transitional year
Partnerships also have the option of changing their accounting year a year earlier to 31 March 2023. This avoids transition rules of reporting and means they can use the full overlap profit brought forward in the current tax year 2022/23.
When a partnership decides to change its accounting date a year earlier to 31 March 2023, it should be treated as a normal change in accounting year. The main benefit is that overlap profit brought forward would get full relief in this year.
The Autumn Budget announced a reduction in the higher rate of Income Tax threshold from £150,000 to £125,140 from 2023/24 onwards. This means partners with income over £125,140 could potentially save more than £1,200 in Income Tax just by changing their accounting year, a year earlier, to 31 March 2023.
Comparison example: shortening accounting year to 31 March 2023 or 31 March 2024
ABC LLP, a professional services firm with 20 members, draws up its accounts to 30 April. Profit for the year ended 30 April 2022 is £2.4 million, and the partnership results for the next two years are expected to be similar to this year’s. Each member has overlap profit brought forward of £80,000.
Year ended 31 March 2024
Under transitional year rules, the 2023/24 net income after tax, per partner
Profit for current year ended 30/04/23
Profit for the 11 months to 31/03/24
Overlap profit brought forward
Transitional profit taxable in 2023/24
Total taxable income in 2023/24
(B + E)
Taxable in the next 4 years
(E) x 4
Total IT and NICs for the 2023/24 year + transitional profit taxable in the next 4 years
% of net income out of total income
% of net against total income
£59,150 (£47,870 + £11,280)
Changing accounting date, a year earlier to 31 March 2023
The 2022/23 net income after tax, per partner
Profit for 12 months ended 30/04/22
Profit for 11 months to 31/03/23
Overlap profit brought forward
Profit taxable in 2022/23
Total IT and NICs payable
Net Income after IT and NICs
% of net income out of total taxable income
31 March 2023 or 31 March 2024 – who are the winners?
There are various factors to consider before making a decision to change the accounting year end. Looking at the two examples above, there are clearly some tax advantages for choosing March 2023 year end, with over £3,200 tax savings.
This choice looks more favourable, particularly in situations where members’ incomes for the current year basis are close to the new higher rate threshold of £125,140 and without taxing all transitional profit (additional months income, less overlap profit available), the current year’s higher rate threshold up to £150,000 will be wasted. (TL – the one single sentence makes more sense than the two)
But there may be little to gain by choosing March 2023 year end for the members with partnership income over £150,000 in 2022/23 and over £125,140 in 2023/24, as this year’s higher rate band will be utilised in full.
Information in this publication is intended for general guidance only, and should not be used in place of professional advice. For more details and advice on any issues raised in this article, please contact Tilak Lamsal or Stephen Kenny.