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Final details of the basis period reform announced

Louis Baker, Head of Professional Practices
05/11/2021
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The government have included the final details of the reform of basis periods in the Finance (No.2) Bill 2021. The reform will be implemented with a transitional year in 2023/24 and the new rules applying from 2024/25 onwards.

This will have a cashflow impact for firms which reserve for tax for partners and do not have a 31 March or 5 April year end, with the first additional tax payable on 31 January 2025. The impact will be particularly significant for many of those firms who have annual accounting dates ending early in the tax year, such as firms with year-end dates ending on 30 April (a very common accounting date), 31 May or 30 June.

Partners in firms that do not have a 31 March or 5 April year end and which do not reserve for their tax for them will suffer the cashflow impact personally.

The details are broadly the same as the government previously announced in a consultation this summer, albeit delayed by one year and with some refinements on some aspects as a consequence of that consultation exercise.

The new rules will be for partners to be assessed to tax on profits arising in the tax year (the year to 5 April annually), rather than on the profits of the accounting year ending in the tax year.

Assessable profits in the 2023/24 transition year

The transition tax year will be 2023/24 when a partner’s assessable profits will be on their share of profits for the normal accounting year ending in the tax year (the “standard part”), plus the profits from the end of that tax year through to 5 April 2024 (the “transition part” if any – which will not be the case for firms with a 31 March year-end), less their overlap relief (which should be nil in cases where the firm has a 31 March year-end).

Spreading of the impact of the transition

The “additional net profits” (our term and being the “transition part” profits less the deduction of overlap relief) are to be a separate income item of each partner and the assessment of this is to be automatically spread in equal instalments over five years commencing with 2023/24 and ending with 2027/28. Each partner can elect to accelerate the assessment to tax of their “additional net profits” at any point during that five-year assessment period. 

Changing a firm's year end during the transition

If a firm changes its year end to 31 March 2024 then its profits in the period to 31 March 2024 will be regarded as “transition part” profits and thus part of the spreading instalments – we highlight this seemingly obvious point as this was not the case in the original proposals from the summer.

Partners retiring during the spreading period

If a partner retires from the firm in the five-year spreading period to 2027/28 then any of their “additional net profits” not assessed already in the spreading period will automatically be assessed in the tax year of retirement.

Firms with a 31 March 2024 year end (or 1,2,3 or 4 April 2024)

Firms with a 31 March 2024 year end do not need to worry about the profits for the short period 1 April - 5 April 2024. The legislation makes clear that, for firms with these year-end dates only, the profits from the year end to 5 April are deemed to arise in the following tax year.

Interaction with benefits/allowances

The ”additional net profits” are to be ignored in assessing means tested benefits and entitlements to certain tax allowances.

Loss caused by overlap relief deduction

If the deduction of overlap relief causes a loss, or increases a loss, in 2023/24 it will be treated as a terminal loss and thus capable of being offset against the partner’s taxable profit share from that firm over the previous 36 months.

Examples

Example 1 – firms with a 30 April year end (applicable to many UK centric professional firms).

For the 2023/24 tax year (the transitional year), partners will be assessed upon:

  1. their share of the firm’s taxable profits of the year to 30 April 2023, plus
  2. 341/366 of their share of the firm’s taxable profits of the year to 30 April 2024, less
  3. their brought forward overlap relief

Their “additional net profits” is 2 less 3, and it is this that will be spread over five years - 2023/24 through to 2027/28.

For the 2024/25 tax year, partners will be assessed to tax on: 

  • 25/366 of their share of the firm's profits to 30 April 2024, plus
  • 340/365 of their share of the firm's profits to 30 April 2025

Example 2 – firms with a 31 December year end (applicable to many international focussed firms operating in the UK).

For the 2023/24 tax year (the transitional year), partners will be assessed upon:

  1. their share of the firm’s taxable profits of the year to 31 December 2023, plus
  2. 96/366 of their share of the firm’s taxable profits of the year to 31 December 2024, less
  3. their brought forward overlap relief

Their “additional net profits” is 2 less 3, and it is this that will be spread over five years - 2023/24 through to 2027/28.

For the 2024/25 tax year, partners will be assessed to tax on:

  • 270/366 of their share of the firm’s profits to 31 December 2024, plus
  • 95/365 of their share of the firm’s profits to 31 December 2025

For more information, or to discuss the impact in your firm’s circumstances, get in touch with your usual Crowe contact.

Contact us

Nicky Owen
Nicky Owen
Partner, Professional Practices
London
Louis Baker
Louis Baker
Head of Professional Practices
London