Basis period reform and going concern considerations

12 January 2024

It seems like some time ago when basis period reform was first announced in 2021. A lot has happened since then and we are now well into the transitional year. Our previous articles have covered the technical changes, what your partnership should do next, and the administrative implications of putting in place realistic timelines. For many partnerships, basis period reform will lead to a permanent acceleration in tax payments from January 2025. Where partnerships retain funds to pay their partners’ taxes or are considering changes in distribution policies to assist partners with their tax payments, this could have implications for a partnership’s going concern considerations which we have covered in this article.

Going concern implications

The Members (in the case of LLPs) have an obligation to satisfy themselves that the partnership will be a going concern for a period of at least twelve months from the signing date of the financial statements. Auditors have a responsibility to test the underlying assumptions and disclosures that form the partnership’s assumptions.

For entities where the anticipated signing date will take place in January 2024, there will need to be an assessment of the accelerated tax liabilities due to basis period reform and any impact on cash outflows from January 2025, as this will be a part of the going concern assessment period.

Several considerations will need to be documented in this assessment:

  • The impact of basis period reform on the cash flow forecasts - Members will be expected to perform a base case, and a downside forecast (potential multiple scenarios) as part of their assessment:
    • How accurate is the Members’ ability to forecast the cash outflows in relation to basis period reform? Has expert advice been sought in more complex areas?
    • Will additional financing be needed to support larger cash outflows than previously forecast?
    • Have the Members considered the impact of any additional financing with other borrowings currently in place and any covenants currently being adhered to?
  • Disclosures in the financial statements:
    • Have the Members accurately disclosed their assumptions in relation to going concern – particularly in “worst case” sensitised scenarios that demonstrate the resilience of the partnership as part of the going concern assessment?

Basis period reform will no doubt increase the administration required by finance teams including dealing with their external auditors, but with early engagement the sting of an unwelcome surprise can be avoided.

The changes will put increased emphasis on working capital management processes and accurate cash forecasting as accelerated tax payments will lead to a reprofiling of cash positions in the year.

Good housekeeping activities range from prompt billing, ensuring invoice accuracy and client risk profiling to effective collection and dunning processes. Educating fee earners on the direct financial impact of poor cash management and incentivising good behaviour will reap significant benefits - a far better conversation than restricting drawings or raising debt in the current environment.

Indeed, if managed effectively, basis period reform can be used as a catalyst for driving greater focus on working capital management and offers the opportunity to elevate the importance of cash as a key performance metric - something that will stand firms in good stead in an unpredictable world.

To discuss how we can help your partnership, please contact your usual BDO contact and for further information on how we can help you with basis period reform, please follow the link:

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