Basis period reform implementation confirmed

Autumn Budget 2021: Basis period reform implementation confirmed

Louis Baker, Partner, Head of Professional Practices
27/10/2021
Basis period reform implementation confirmed

The Chancellor has confirmed that the reform of basis periods 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 partners in firms which do not have a 31 March or 5 April year end, with the first additional tax payable on 31 January 2025.

Firms with a non-31 March or 5 April year end will have to change their timetable for the production of taxable profit information for partners.

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

The government will announce the draft legislation on 4 November 2021, along with its response to the consultation exercise that ran this summer.

HMRC have indicated that there will be some tweaks to the original proposals to allow some flexibility in the use of overlap relief in the transition and some measures to reduce the impact of the transitional extra profits on tax allowances and reliefs.

Example (using a 30 April year end)

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

  • their share of the firm’s taxable profits of the year to 30 April 2023, plus
  • 11/12 of their share of the firm’s taxable profits of the year to 30 April 2024, less
  • their brought forward overlap relief.

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

  • 1/12 of their share of the firms profits to 30 April 2024, plus
  • 11/12 of their share of the firms profits to 30 April 2025.

For most affected partners, their 2023/24 taxable profits (and therefore tax) will be higher than normal (potentially considerably so), and the original proposal from the government was that the additional profits (and therefore the tax impact) could be spread over five years.

Look out for our further updates once the draft legislation is published on 4 November 2021.

Autumn Budget 2021

What do the announcements mean for you and your organisation?

Insights

The government has announced that the introduction of Making Tax Digital (MTD) and the potential basis period changes have been delayed.
The government has announced a consultation on its proposal to simplify the rules under which profits of the self-employed are allocated to tax years.
Assessable profits will now be those arising in the tax year, which will impact firms who do not have a 31 March/5 April year end.
The government has announced that the introduction of Making Tax Digital (MTD) and the potential basis period changes have been delayed.
The government has announced a consultation on its proposal to simplify the rules under which profits of the self-employed are allocated to tax years.
Assessable profits will now be those arising in the tax year, which will impact firms who do not have a 31 March/5 April year end.

Contact us

Louis Baker
Louis Baker
Head of Professional Practices
London