Change to Basis Periods for Businesses Confirmed in Autumn Budget
In our previous blog we discussed HMRC’s consultation on reforming Basis Periods for unincorporated businesses (e.g. sole traders and partnerships) and the changes to the rules being considered.
In the Autumn Budget 2021, it was confirmed that the proposed changes to the rules will be introduced with effect from the 2024/25 tax year. In order to allow for this, the 2023/24 tax year will be a ‘transition year.’
In summary, the changes will mean that businesses will be taxed on profits arising in the tax year. Accordingly, businesses with a period of account that does not match the tax year will have to make an apportionment to identify the profit or loss arising in a specific year. For further details please see our previous blog.
The 2023/24 tax year will be a ‘transition year.’ In this year, the basis period will be:
- the 12 months from the end of the basis period in the 2022/23 tax year; plus
- a transition component running from the end of these 12 months to 5 April 2024; less
- any outstanding overlap profits brought forward.
To address potential cash flow issues, where a business has higher profits in the transition year due to the change in basis period, the additional profits will be spread automatically over five years. However, an election could alternatively be made to treat the additional profits as instead arising wholly in 2023/24.
Worked Example: How will this work in practice?
Here, we will provide a worked example to help you understand how this will affect you in practice.
- A partner is a member of a partnership and the partnership’s accounting period end date is 30 April.
- The partner has overlap profits brought forward of £200,000 under the current basis period rules.
- The partner’s share of the partnership’s profits to 30 April 2022 are £275,000.
- The partner’s share of the partnership’s profits to 30 April 2023 are £250,000.
- The partner’s share of the partnership’s profits to 30 April 2024 are £300,000.
- The partner’s share of the partnership’s profits to 30 April 2025 are £325,000.
2022/23 Tax Year (Basis Period Rules):
|Profits arising in the Y/E 30 April 2022||£275,000|
2023/24 Tax Year (Transition Year):
|12 months from the end of 2022/23 basis period (30 April 2022 to 30 April 2023)||£250,000|
|Transition component (30 April 2023 to 5 April 2024) = 11/12 x £300,000||£275,000|
|Less overlap profits brought forward||(200,000)|
*As noted above, if the partner has higher profits due to the change in basis period, the additional profits will be spread over 5 years unless an election is made to tax them in 2023/24. Here, the additional profits are £75,000 (i.e. £325,000 less £250,000). This will automatically be spread over a period of 5 years, unless the partner makes an election to tax them in 2023/24.
2024/25 Tax Year (Profits allocated to tax year 6 April 2024 to 5 April 2025):
|1 month of partnership profits to 30 April 2024 = 1/12 x £300,000||25,000|
|11 months of partnership profits to 30 April 2025 = 11/12 x £325,000||£297,917|