* Updated in October 2023
HMRC’s Basis Period Reforms move the Current Year Basis of Assessment to a Tax Year Basis and will be effective from the 2024/25 tax year with 2023/24 being a transitional year.
This upcoming change is due to significantly impact all partnerships who do not have a 5 April or 31 March year end accounting date. The question is, are you and your business ready for this change?
Many professional partnerships today do not appreciate the wide-ranging implications for the operational finances, and personally for its partners. Indeed, these reforms arguably touch upon and demand changes to almost every aspect of the firm’s partnership operations and membership agreement policies. Although, this may seem daunting, it provides partnerships with a huge opportunity to start planning, seeking professional advice and to take control of the non-tax implications to maximise the benefits of the change.
The new legislation moves taxation onto a tax year basis, thereby accelerating the point at which the tax is due. From 2024/25, partners will be assessed on profits made in the tax year, rather than the accounting year that ends in the tax year.
This ostensibly seems like a job for the firm’s internal finance team; however, the full consequential impacts run far deeper than this team’s capabilities and require broad and deep financial and tax expertise combined with operational change skills.
Partners may need to file a tax return with provisional figures each year. So, for example, a partnership with a 31 December year end, for the tax year 2025/26, a partner will apportion profits from both the accounts to 31 December 2025 and 31 December 2026. The filing date for 2025/26 is 31 January 2027, only one month after the 31 December 2026 period by which time is very unlikely that final accounts and tax-adjusted profit share information will be available.
In the shorter term, with 2023/24 being a year of transition, during this period profits will be calculated from three amounts: profits under the current rules, the remaining tax year profits and any overlap relief. Some of the profits for the transition year may be able to be spread for tax purposes over five tax years.
Now to address the change, many firms are considering a move of their accounting date to avoid any need to apportion profits from two different accounting periods and the concomitant need to make profit estimates. Admittedly, a change can be disruptive to administration of the business, especially in partnerships, however, if handled correctly it can be hugely beneficial.
HMRC have recently indicated that about two thirds of professional firms will be affected by the new legislation and are expecting many to switch to a 31 March year end to simplify the tax accounting. However, the timing of a change in accounting date is important to minimise the impact and there are a number of substantial reasons why such a change is non-trivial, requiring careful consideration and planning.
If your firm is considering a change of year end as a solution to the Tax Year Basis change, we recommend seeking professional and thorough advice as early as possible to avoid the potential landmines.
There are multiple non-tax implications to consider, such as your firm’s profit-sharing arrangements, your cash-flow management, and the timing of any partners joining and leaving the firm over the next few years who could well be personally affected by the change. These are all aspects which should be acted upon sooner, rather than later to benefit from maximising partner profits.
If a partner leaves or is due to retire within the five-year period over which transition profits might be spread, the remaining transition profits are taxed in the final year. But will there be a scenario where it is beneficial to elect to tax more of the spread profit earlier? It is possible to accelerate the tax years when the transition profits are taxed, and this option should not be discounted out of hand.
There are other concerns, for example if your membership deed specifies a mandatory retirement age based on the nearest accounting date to the retiring partner’s birthday, then changing the firm’s accounting year end could benefit some partners and adversely affect others.
So, what appears on face value to be a straightforward job for your internal finance team to address, the reality is quite different and far broader in impact. This is where we can step in because Lubbock Fine has deep expertise, not just in the accounting and tax aspects, but the wider business and operational partner policy changes that you will need to implement.
The sooner the better. Ideally now.
We can talk you through the uncertainties of the year ahead and the benefit of a potential deferral of some of your tax liabilities through a change of year end.
We know that it’s not just about accounts and tax returns. That’s why we advise on the full range of areas affecting your business, from profit improvements to partner compensation to even strategic advice for business leaders or partners.
Our talented team can also provide tax planning services across a multitude of taxes, ensuring that you are fully compliant with the UK’s complex tax reporting landscape. Not only this, but our specialist expertise and knowledge sets us apart from others, with a long heritage of over 90 years as an independent, partner-led top 60 practice.
If you would like to have an informal chat with an expert, about these forthcoming changes, we’d be happy to assist you. Feel free to get in touch with Mark Turner (firstname.lastname@example.org) our Head of Professional Services or Phil Blackburn (email@example.com) our Head of Tax.