An update from HMRC on basis period reform

Basis period reform represents a significant change to the way in which self-employed individuals, including partners/members in partnerships/LLPS, are subject to UK tax on their income. You can read more on basis period reform in our previous article here.

Basis period reform will be coming into full effect from 6 April 2024 (tax year 2024/25). Before the rules come fully into effect, there will be a transition year in 2023/24 in which individuals will be taxed on profits to the usual accounting date, plus a portion of any profits arising up to 5 April 2024. Automatic relief for overlap profits created in earlier years will also be given in the 2023/24 tax year.

HMRC consultation response

Basis period reform will require individuals to apportion accounting profits to the tax year, where their business does not currently draw up accounts to 31 March or 5 April. They may therefore be required to provide HMRC with details of provisional profits that would otherwise not be available until after the tax return filing deadline of 31 January. HMRC has been consulting on a number of solutions to ease the resulting administration burden.

The options under consideration by HMRC were as follows;

1. Amend provisional tax return figures when filing the following year’s tax return
2. Extend the filing deadline of the tax return
3. True up the final profit in the following year’s return

Following consultation, HMRC has now provided its decision on the easements for provisional figures, being option 1 above, to the House of Lords.

Currently, provisional figures must be updated ’without delay’ once final figures become available; this requirement will be relaxed and taxpayers will instead be able to amend their return to finalise the provisional figures in line with normal amendment time limits, so generally by 31 January following the filing deadline. HMRC will update its guidance to reflect this change before the start of the transition year in 2023/24.

HMRC has advised that the Government views this option as providing the best balance between targeted administration burden savings and avoiding adding significant new complexity to the tax system. The engagement on other options has shown that they would require significant new legislation and rules and therefore, it is not surprising option 1 is being taken forward, although it does increase the tax compliance obligations for both taxpayers and agents.

We will be seeking further clarification from HMRC on the impact that these amendments will have on the usual extension of the enquiry window and the need to pay late payment interest where actual figures may be higher than the provisional figures previously provided.

What should I be thinking about?

While this change will not ease the administrative burden, it does provide additional certainty with regard to the tax compliance process. Now the easements are known, however, we are expecting firms to consider whether or not to change to a 31 March year-end to streamline tax compliance obligations, particularly given the upcoming introduction of Making Tax Digital for Income Tax in April 2024.

Further consideration will also need to be given by businesses and taxpayers to the reserving of any profits for partner tax liabilities, and ensuring that sufficient funds are held in the event that there is a significant change between the provisional and actual figure, as well as to how businesses accurately estimate any provisional figures. The requirement to amend prior year returns may also lead to increased professional services costs for businesses and individuals.

Record of overlap relief

A further point under consideration was that some businesses and individuals may not hold accurate records of overlap profits, either where accurate records have not been kept or where this was generated a long time ago. The Government is continuing to explore methods of providing overlap relief figures to taxpayers and their agents; whether by informing businesses and agents of overlap relief figures that HMRC holds, or by providing a method for businesses and agents to request these figures from HMRC.

HMRC has commented that for businesses looking to change their accounting dates, or use overlap relief in 2022/23 or 2023/24, they should wait until HMRC is able to provide further detail on overlap relief support which HMRC is hoping to provide in the coming months.

How we can help

Do get in touch if you would like to discuss the impact this reform will have on your business, and if a partnership/LLP the individual partners/members, including any decision your business is looking to take in changing its year end to be in line with the tax year.

Many businesses use partner tax reserves as a source of working capital and, as such, the acceleration of income tax may result in additional sources of funding being required. With borrowing costs continuing to increase, firms will be mindful of both the administrative and cash-flow impact of basis period reform. We therefore highly recommend modelling the cash-flow impact, well in advance of the 31 January 2025 tax payment and would be delighted to discuss this with you.

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