Dipesh Galaiya BSc (Hons) FCA
- Private Client Tax Senior Manager
- +44 (0)330 124 1399
- Email Dipesh [email protected]
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The Government has issued draft legislation covering proposed changes to basis periods. This may seem a dry, technical subject but it will have far-reaching cash flow and administrative costs for many unincorporated businesses.
For all unincorporated trading businesses (such as sole traders, partnerships and LLPs), the basis period for a tax year is the 12 months ending with the accounting date in that tax year. For example, a partnership’s trading profits for the year ended 30 April 2021 will get assessed in the tax year 2021-22 as its accounting date (i.e. 30 April 2021) falls in the tax year 2021-22 (i.e. between 6 April 2021 and 5 April 2022).
There are special rules for the opening and closing years of a business and when there is a change in the accounting period end.
The current rules in the early years of a business (or when a partner gets appointed to the partnership) can create overlapping basis periods which result in profits being taxed twice. These amounts are given as reduction when the business ceases, or when a partner retires. This relief is called overlap relief.
This adds to the complexity, but the rules allow a significant deferral of tax when profits are rising. For example, a business with a 30th April year-end, will not pay all tax on its profits until the January 21 months after that date.
Company tax rules are different and are not proposed to change.
The proposal is that businesses will be taxed on the profits arising in a tax year for 2023-24 onwards (with a transitional year in 2022-23). The reform aims to make the basis of assessment for trading profits simpler and aligned with other sources of income which then links in with the government’s plans for Making Tax Digital (MTD). MTD is mandatory for self-employed businesses from April 2023.
MTD (for income tax) will apply to unincorporated businesses and landlords with an annual income exceeding £10,000. It is intended that the rules will also apply to partnerships (that only have individuals as partners) and trusts with business or property income. All other partnerships (e.g. limited partnerships, limited liability partnerships (LLPs) and those that have corporate partners) are not required to join MTD for Income Tax in April 2023, but at a later date (to be confirmed).
These proposals are to enable a tax system from the 19th century to be shoe-horned into the digital requirements of the 21st century. The proposed changes to basis period rules include:
Whilst the proposed change would go largely unnoticed by businesses that use an accounting date of 31 March or 5 April, these changes could be very problematic for businesses that use a different accounting date, such as one later in the tax year. Some of the challenges include:
Therefore, in practice, most businesses may move their accounting date to say 31 March to deal with the challenges above and most accountants will need to process their clients’ accounts at a similar time, unlike phasing their work through the year based on different clients’ accounting dates.
Some partnerships which are owned by members resident in the USA will invariably have their accounting date as 31 December (so as to comply with US tax rules) and these could continue to face the above challenges in so far as the UK tax regime is concerned.
The Government has published a consultation on the proposals which closes on 31 August 2021. The final contents of the Bill will be subject to confirmation in the Autumn.
Please contact us should you require further clarification on how these proposals affect you and your business.
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