BASIS PERIOD REFORM Finance Bill 2021-22 includes legislation implementing the basis period reform first proposed in the summer. The reform aims to move from taxing sole traders and partnerships that are subject to income tax, from the current method which is generally to tax profits arising to an accounting date ending in a tax year, to taxing such businesses on the profits arising in a tax year. Whilst this is still an evolving topic, it is unlikely to go away and sole traders and partnerships who do not prepare their accounts to 31 March or 5 April will need to act and consider their positions sooner rather than later.
SO, WHAT DOES THIS MEAN?
OVERLAP RELIEF
In the transitional year which is expected to be 2023/24, businesses that do not have an accounting year end date between 31 March and 5 April will need to recognise two profit elements:
If the business has any overlap profits, it must offset these against the profits of the 2023/24 tax year. There is no facility to allow the business owner to defer the use of overlap relief and save it up to use on a subsequent occasion (e.g., on retirement).
• The ‘standard part’ - being the profit on the 12 months’ worth of trading beginning with the start of the basis period ending in the transitional year • The ‘transitional part’ - being the profits in respect of the period beginning immediately after the end of the basis period and ending on 5 April 2024.
EXAMPLE:
A business has a 12-month accounting period ending 30 April 2023. In the 2023/24 transitional year it will recognise: The profits arising in the 12-month period ended 30 April 2023 (the standard part). The profits arising in the period from 1 May 2023 to 5 April 2024 (the transitional part). As you can see from the above, this will mean nearly two years of profits fall into the 2023/24 tax year. Reliefs are available in the form of overlap profits and spreading, as explained below. 012
ENTERPRISE NE WSLE T TER
Following several steps involving the deduction of overlap relief and comparison of the amount of the standard part and transitional part, two numbers arise: • transition profits; and, • the profits of the tax year 2023/24 (generally the share of the transition profits for 2023/24 plus the standard profit if that was more than nil).
SPREADING THE TRANSITION PROFITS Having calculated the transition profits (after the offset of overlap relief) you are going to be allowed to spread them over five tax years, beginning with the transitional year itself. While spreading helps to mitigate the cashflow impact of recognising in some cases nearly two years’ worth of profits in one tax year, it has other unwanted consequences. For example, under the original draft of the legislation published in the summer, for those years over which the transitional profit is spread, taxable income would have been increased for the purposes of determining entitlement to personal allowances and the imposition of charges such as the high-income child benefit charge.
