Autumn 2021 saw the Government announce the planned reform for ‘basis periods’ meaning unincorporated farming business’ profits will be taxed with reference to the UK tax year, rather than the business’ accounting date. How will this impact businesses and what should they be aware of?
Currently unincorporated businesses are taxed on profits arising from a set of accounts ending in the tax year. Many farming businesses will have a 30 September year end to assist with stock valuation following harvest. If a business’ year end was 30 September 2022, this falls within the 2022/23 tax year and so the profits relating to that year would be taxed when the 2022/23 tax return is submitted.
The proposed changes largely centre around the Government’s aim to create a simpler, fairer and more transparent set of rules for the allocation of trading income to tax years.
What is changing?
From 6 April 2024 all unincorporated businesses will be taxed on profits arising in the UK tax year regardless of the business’ actual accounting year end date. Businesses with a 31 March year end are unaffected as HMRC treats 31 March and 5 April the same.
The preceding tax year (2023/24) will be treated as a ‘transition year’ to ensure all businesses start their new tax basis period from 6 April 2024.
How does it currently work?
There are currently specific rules, commonly known as the ‘opening year rules’, that ensure a taxpayer is only ever taxed on profits earned over a maximum 12 month period. If a business has a year end other than 31 March or 5 April, some profits can be taxed twice in the opening years resulting in ‘overlap profits’. These double-taxed profits can only be offset in a limited number of circumstances – namely when a business changes its year end or the taxpayer ceases to trade.
How will it work in the transition year?
In the ‘transition year’ a business will calculate all untaxed profits arising after the end of the basis period used for the 2022/23 tax year up to 5 April 2024.
Take, for example, a farming partnership with a 30 September 2022 year end, in the transition year all profits arising from 1 October 2022 to 5 April 2024 would be taxed. This 18 month period is split into two elements – the standard part from 1 October 2022 to 30 September 2023 (the basis period that would have applied without a rule change) and the transition part from 1 October 2023 to 5 April 2024.
The new rules allow for the transition part, after deduction of any overlap profit brought forward, to be spread over five tax years to ensure there is no impact on a taxpayer’s means-tested benefits, entitlement to personal allowance or the high income child benefit tax charge . A taxpayer can elect to accelerate the transition profits and tax them all in one year if they prefer.
If any overlap profits brought forward exceed the value of the transition part, this loss can be treated as a ‘terminal loss’ and offset against farming profits declared in the three previous tax years (latest year first). This may be particularly important for businesses with larger overlap profits brought forward, such as those with a 30 April year end.
Should I change my year end now to 31 March or 5 April?
Some farmers have decided to change their year end this year to 31 March/5 April 2023 so they do not feel the impact of this reform. This could accelerate relief for overlap profits.
Some farmers, however, have expressed reluctance to change the year end date given the inherent operational benefits of keeping, for example, a 30 September year end. This eases the burden of stock valuation and provides a neat cut off between harvest years, as far as annualised results and trends go.
What if I do not change my year end to 31 March/5 April?
Where a farming business keeps its existing year end, additional work may need to be undertaken to calculate taxable profits for declaration on self assessment tax returns.
Taking a 30 September 2024 year end as an example, in the 2024/25 tax year, six months of the September 2024 profit will be added to six months of profit from the year to 30 September 2025 and taxed. The amount of these profits, however, may not be known by the time the 2024/25 tax return is due to be filed, and so estimates may need to be used instead. This could lead to over or under payments of tax until actual results are known.
HMRC has set out a number of proposals for addressing this issue.:
- Allowing taxpayers to amend a provisional figure at the same time as filing their return for the following tax year;
- Allowing an extension of the filing deadline for some groups of taxpayers, such as more complex partnerships;
- Allowing taxpayers to include any differences between provisional and actual figures in their subsequent year’s tax return; or
- Leaving the current rules on provisional figures unchanged so profits are estimated on the return and amended as soon as final figures are available.
Clearly some additional work will be required in the majority of these scenarios, which could lead to increased professional costs.
How can we help?
We pride ourselves on our expertise in the rural and agricultural sector. We deal with many clients who are facing this reform and work with each client individually to determine the best way of dealing with this. We can work with businesses on both operational and financial matters, as well as strategic matters.
We place the power of good advice into your hands so please do get in touch if we can assist you in this or any other area of your business.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.