From the 2024/25 tax year, all business profits subject to income tax, will be assessed on the profits arising in the tax year, no matter what date their accounts are drawn up.
Currently businesses are taxed on the profits ending in a tax year, for example, accounts drawn up to 30 June 2022 are taxed in the 2022/23 tax year. There is no legal obligation for the business to change its accounting year to that of 31 March/5 April. However, those business that do not change will have to make an apportionment to identify the profits arising in the tax year. This will mean that they must either have two sets of accounts available at the time of preparing their tax return or will be required to use provisional figures for the period where accounts are not yet available.
The taxpayer will then have to review and amend the provisional figures used on the tax return when their accounts are finalised. HMRC is currently undertaking a consultation into easements for reporting adjustments to provisional returns. Further information on specific easements to be introduced are expected to be available in Autumn 2022.
During the transitional tax year 2023/24, those businesses with a non-31 March/5 April accounting year will be taxed not only on the profits arising in their normal accounting period, but also on the profit for the number of months up to that tax year end. There are spreading provisions to help with the extra tax generated.
For businesses that do not currently have a 31 March/5 April accounting year end, the reforms will accelerate tax payments for many businesses. It may also push individuals into higher tax rate bands. Businesses may incur additional professional fees for the preparation of two sets of accounts or providing estimates which require prior year amendments on an ongoing basis. The reform could also result in a change to High Income Child Benefit Charge computation, student loan repayment calculations and in some cases, a loss of the tax-free personal allowance, for many taxpayers.
The proposed transitional year arrangements do provide for use of existing accrued overlap relief. If the business has any overlap profits, it must offset these against the profits of the 2023/24 tax year. There is no option to allow the business owner to defer the use of overlap relief and save it up to use on another occasion (e.g. retirement). Businesses operating for many years may not know or have a record of their overlap profits, as this information may have been lost over time. These businesses will need to rely on HMRC to provide the figures.
In addition to the financial implications, there are also a number of practical issues to be considered some of which are highlighted below:
- As the changes can be complex to understand, additional time and costs may be required to help businesses implement the necessary changes.
- Many business owners may need to consider whether their current trading vehicle i.e., a sole trade or partnership is the most appropriate for their business, going forward. If this structure is to be changed, the timing of this change can have many implications. This can be a complex process for many businesses.
- The implications on farmers averaging calculations.
- Pension planning implications.
- The changes may alter the optimal date for retirement and accelerate the transition period profits in the final tax year of trading.
We recommend that our clients, who will be affected by these changes, speak with your client manager or the CavanaghKelly team and take advice now to help ensure they understand the real impact of these changes on their business including:
- How to manage the immediate cash-flow impact of the changes;
- Consider changing their accounting date to 31 March to simplify the calculation of assessable profits from 2024/25;
- Consider whether incorporation would be beneficial for their sole trade/partnership business; and
- Businesses who commercially may not be in a position to change their accounting date, should consider the processes which need to be in place to file provisional and then final tax returns for each period.
Whilst every effort has been made by CavanaghKelly to ensure the accuracy of the information here, it cannot be guaranteed and neither CavanaghKelly nor any related entity shall have liability to any person who relies on the information herein. Information given here is for guidance only. Detailed professional advice should be taken before acting on any information contained herein. If having read the guidance here, you would like to discuss further; a member of our team would be pleased to help you.