Remember that Basis Period Reform has still gone through – despite delays to MTD27/07/2023
At the end of last year, Making Tax Digital (MTD) was pushed back to April 2026. However, the Basis Period Reform (BPR) that accompanies it was not. That means that, as of April this year, BPR has gone through – and it may have big implications for how you pay your tax.
Who does BPR apply to?
The changes made by BPR will apply to all sole traders, unincorporated partnerships, and Limited Liability Partnerships (LLPs) that DO NOT currently have a 31 March or 5 April accounting year end.
What is BPR?
BPR requires all self-employed people and partnerships, regardless of accounting period, to disclose their company tax information to HMRC on a tax year basis. A tax year is a 12-month period that runs from 6 April to 5 April of the following year, therefore the 2024/25 tax year goes from 6 April 2024 to 5 April 2025.
For those businesses that do not currently have a 31 March or 5 April year end, the 2023/24 tax year (6 April 2023 – 5 April 2024) will serve as a transition period between the old and new standards of reporting. This means that some taxpayers will record profits for more than a 12-month period on their 2023/24 tax return.
The transition year
As the year of transition, 2023/24 will be a pivotal tax year. Individuals will be taxed on all untaxed taxable profits earned up to 5 April 2024, regardless of when they last reported (although overlap profits made under the current basis period regulations will be exempted).
For example, in the case of a continuous 31 December accounting year-end, the tax return in 2023/24 must contain profits for the 12 months ended 31 December 2023 plus profits for the three months ended 5 April 2024.
There are procedures in place that allow the payment of the tax burden created by transitional period profits to be spread out over five tax years, beginning with the transition year (HMRC gives a full run down of the process here). This should help with cash flow by deferring payment of the additional tax owing on these gains until the fiscal year 2027/28.
What are the implications for your business?
We believe that all affected business owners should seriously consider whether shifting their company’s fiscal year-end to 6 April is advantageous. Unless there is a compelling commercial need to keep a different year-end, we believe that most businesses will (rightly) prefer to match their year-end with the tax year. In the long run, this should make reporting simpler.
Maintaining a different year-end will result in an increase in accountancy fees, as financial accounts as well as anticipated data up to 31 March or 5 April will need to be prepared. You should consider your future tax liabilities, as well as when and how they will become due.
Taking expert advice on these matters, and starting your planning process straight away, are two of the next steps you should take. Contact JW Hinks’ experienced tax team on 0121 456 0190, and let us help to ensure you are well prepared for the new rules that have come into effect this tax year.