Reform of basis periods which could mean earlier payment of tax

HMRC look set to increase the number of businesses which will be required to report quarterly to HMRC under Making Tax Digital for VAT.

HMRC originally planned to extend this further with the introduction of Making Tax Digital for Income Tax which will require all businesses, including rental businesses with income of over £10,000 per annum to undertake quarterly reporting. This was originally intended to be introduced from April 2023, however, has now been delayed until April 2024.

Part of HMRC’s plans for moving to quarterly reporting look likely to involve a further major change and they plan to reform the way in which profits from unincorporated businesses are taxed.

Currently, all unincorporated business are taxed on the profits in the 12 months ending with their accounting date which falls in the tax year. So, if you have a 30 April year end, the profits from the 12 months to 30 April 2021 will be taxable in the 2021/22 tax year and the tax payable by January 2023.

HMRC are now proposing that a business’s profit or loss for a tax year will be the profit or loss arising in the tax year itself, regardless of its accounting date. This will be known as the ‘tax year basis’.

Current proposals are that this will be effective from the 2024-25 tax year. The 2023-24 tax year is to be a transitional year and the changes in that year could see larger than usual tax bills payable by January 2025. In this year, all businesses will have their basis period aligned to the tax year and all outstanding overlap relief (which is usually generated when the business commenced) will be given.

Accelerating profits into an earlier tax year in this way could mean some businesses will be taxed on up to 23 months of profits in one year, and in instances where overlap profits are small, the January 2025 payment deadline could mean a very expensive month for some.

However, HMRC are proposing to spread excess tax in the transitional year over a period of five years.

HMRC are not legislating that businesses will be required to change their accounting year end date, however, due to the difficulties in apportioning profits and the need to use estimates which would need to be checked and revised later, they expect many will do so.

Tax planning, or cashflow/profit projections could be advisable for many in order to be prepared.

For further information on these matters, or to discuss in more detail, please contact Marie Gilmour.

Marie Gilmour | marie.gilmour@renniewelch.co.uk.