Basis period reform: Changing how business profits are taxed from 2023/24
On Thursday 4 November, HMRC and Government announced a number of changes to its proposals for basis period reform from April 2024. These are designed to alleviate the unintended impacts of the transitional rules but the proposals will still accelerate tax charges for many individuals in partnerships.
Overall, there are some welcome changes stemming from the consultation responses submitted by BDO and others. However, there is still fundamental analysis to be concluded that will impact a large proportion of professional services firms.
The Finance Bill confirms that the transitional period will now be 2023/24 with a start date of 2024/25 for the new tax year basis of assessment. This is a welcome change that will allow businesses a little more time to deal with a number of inherent complications, such as the interaction of multiple trade overlaps and foreign taxes etc. We recommend that firms make good use of the time available.
HMRC’s response to the consultation feedback suggests that it will consult further on the considerable administrative burden presented by the rules that will mainly impact large LLP businesses – this is expected to take place over the coming year. As a business, we will be sharing our thoughts and responses on the practical issues directly with HMRC – if you would like to feed into our responses, please do contact us.
Many firms have already completed their analysis of the potential cashflow impact resulting in a review of both current funding covenants and consideration of alternative financing arrangements. With HMRC’s impact assessment indicating a £1.7bn tax inflow by 2027 as the change of basis beds in, this will be a major issue for many, somewhat eased by the ability to spread the excess profits over five years.
We’ve updated our detailed summary of the rules which you can access here.
What should you consider next?
- Updating the cashflow impact of the change, including an impact assessment following the introduction of the new Health and Social Care Levy.
- Should you be changing your account year end to 31 March (or would it now be better to align to the rest of the world on a calendar year)
- How your funding requirements and any banking covenants are affected
- Managing the communication to the partners and their personal impact
- Assessing the impact of double tax relief in the transition period
- What action is needed (if any) to ensure each partner is able to get relief for their overlap profits
- How this change impacts any secondary partnership arrangements (for those partners with multiple interests)
- How your internal systems will need to be adapted
We can help you analyse the impact the reforms will have on your business for these and all other areas and prepare any financial projections that are needed.
Blog: Basis period change – a real can of worms!
For help and advice on your businesses’ situation, please get in touch with Neil Williams, Professional Services Tax Partner.
Get in touch with our tax team