Basis period reform - time to change your accounting date?
Author: Tim Golby, Tax Partner
Basis period reform and the move to a ‘tax year’ basis of assessment in April 2024 will make a profound change to the time which partnerships and sole traders have to calculate, allocate and pay tax on their profits.
While the reforms do not force businesses to adopt a specific accounting date, they do remove certain administrative and cash-flow advantages previously available by making an appropriate choice of accounting date.
This article looks at the tax and commercial factors which firms consider when they choose their accounting date and why now might be a good time to make a change. You can read more detail about the core reforms and the changes to how business profits will be taxed from 2023/24 here.
more detail on the core reforms
Choosing your year end
Historically, firms chose their accounting date based on competing commercial, administrative and tax-related factors. The reforms will remove some of the advantages which were available to firms with an accounting year-end which is different from 31 March as profits from two accounting periods will need to be apportioned to arrive at figures for a tax year.
Previously, the earlier in the tax year a firm chose to have its accounting date the longer they had to draw up their accounts. A firm with a 30 April year end, for example, had a leisurely 21 months in which to produce audited accounts, adjust those accounts for tax purposes and decide upon the allocation of tax-adjusted profit amongst partners in order to file partner and partnership tax returns on time.
Under the tax year basis of assessment, firms with a 30 April year end will now only have 9 months for this process and firms with a 31 December year face a frantic single month in which to get everything done. In reality, firms with a 31 December year will have to use estimated figures in their returns and correct them within 12 months.
Firms who don’t have a 31 March year end have also lost a significant cash-flow benefit. In a time of rising profits, firms with an accounting year which ended early in the tax year had a significant cash flow advantage over firms with an accounting year which ended later in the tax year. The effect of overlap profits and relief allowed firms with an early accounting date to defer tax.
The loss of these administrative and cash-flow benefits has caused many firms who do not already use 31 March as their accounting date to consider whether to make a change.
Stick or change your accounting date?
Firms that have decided to re-evaluate their choice of year-end tend to approach the issue in one of three ways:
- Move to a 31 March year end. As the reforms remove the opening and closing year rules and the interaction of those rules with double tax relief, a 31 March accounting date will make tax administration for partners a much easier process. Add in the loss of the administrative and cash-flow benefits for accounting dates ending early in the tax year and firms start to see a compelling case to move to a 31 March year end. However, firms looking to make a change should also consider the non-tax commercial consequences in order to make a balanced assessment.
- Move to a 31 December Year end. Now that the cash-flow advantage of an accounting year ending early in the tax year has gone, many partnerships that have branches or entities in countries with a calendar tax year are attracted to a 31 December year-end to align across the organisation. Despite the administrative burden such a change will create in the UK (the need to estimate and later amend figures so that partner returns can be filed on time), the benefit of having an accounting date which corresponds to the tax year in a majority of countries cannot be underestimated. Of course, there are still the commercial consequences of changing year-end to factor in.
- Maintain their existing accounting date. These firms will need to consider how they will manage the additional administrative burden produced by basis period reform. For example, even HMRC recognised that firms with year ends as early as 30 September, may still struggle to re-define their compliance process to be able to file accurate partner returns by 31 January and may have to estimate and ultimately re-file those returns.
The financial management, governance and reward structure of a firm will usually be based around a specific year-end. When considering whether to move year-end it is important, therefore, to consider these commercial issues, particularly in the period when the partnership moves to the new accounting date as this period will not be 12 months long.
A list of the issues firms might look at could include:
- Budgeting for a new accounting period which is shorter or longer than 12 months.
- Assessing partner performance for that period and paying profits on more or less than 12 months.
- Managing the change of year-end internationally.
- The impact on staff contracts, pay, bonuses and holidays of a non-12-month accounting period and a new year-end going forwards.
- The effect on the firm’s accounting system.
- Managing supplier relationships including banks.
The decision-making process
A new year-end represents a fundamental change to the fabric of a business and its ramifications need to be considered carefully. The variety of factors at play mean that the decision-making process will be far from straight forward and firms will need a robust process of evaluation in place to decide whether a change of year-end is appropriate.
However, the transition year for the reforms starts on 6 April 2023 and, as a result, there is only a limited amount of time for firms to decide to change if they want to align their new accounting date with the end of the transition year.
This is particularly acute for firms with a 31 December year who would need to start their new 15-month accounting period on 1 January 2023 to align with the end of the transition year on 31 March 2024.
Even if firms decide it isn’t appropriate to change their year-end at this time, it is unlikely that the issue will go away. Over time, as new partners join a business and old partners retire, the partner group will become populated by a majority of individuals who don’t have experience of the current year basis of taxation and can see no reason to maintain an accounting year end which isn’t aligned to the tax year.
How BDO can help
The reforms give a strong incentive for firms to reconsider which date is most appropriate for their year-end. However, the decision making process is complicated – a wide range of tax, commercial, administrative and cash-flow based factors should be taken into account.
BDO and its experienced team of partnership tax specialists can help you decide whether a change of accounting date is right for your business, and we can guide you through the transformation process once a decision has been made.
For help and advice, please contact Tim Golby or your usual BDO adviser or leave your details below:
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