The government has announced a consultation on the detail of a proposal to change the basis period year rules for the self-employed (including partnerships and LLPs).
The proposal is that the assessable profits will be those arising in the tax year, rather than the current rule which is to tax the profits of the accounting year that ends in the tax year.
This will affect all firms that do not have a 31 March/5 April year end and it is proposed that 2022/23 will be the transitional year.
If a firm has a 30 April year-end which retains that accounting date, according to the new rules the profits are prorated into the relevant tax year. Therefore, the profits assessed in the 2025/26 tax year would be 1/12 of the year to 30 April 2025 and 11/12 of the year to 30 April 2026.
In the 2022/23 transitional year the assessable profits would be those of the year to 30 April 2022 plus 11/12 of the year to 30 April 2023 less overlap profits brought forward.
This is a partner by partner calculation. If the transitional assessable profits in 2022/23 are higher than would be the case under the current rules, then it is proposed that there will be a spreading election, but at the partner rather than firmwide level.
At this stage firms should work on the assumption that the proposals will be broadly adopted as outlined.
Firms with year ends that are not 31 March or 5 April will need to review their working capital model as tax retentions may often be lower in the future, plan for the extra tax that will arise on 2022/23 tax assessments (mainly tax payable 31 January 2024 subject to spreading elections) and consider whether to change their year-end to 31 March.
The consultation period ends on 31 August 2021. It is likely the final legislation will be enacted this winter.
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