The government has published draft legislation that will align all basis periods for unincorporated businesses with the tax year. The transition will come in 2022/23, but why should you be acting on it now?
Basis
Legislation day on 20 July 2021 included the announcement and policy note that the government intends to move all unincorporated businesses to a tax year basis period , with the transaction coming in 2022/23 via extending the existing basis period to 5 April 2022. This will supersede the current year basis and make the early years rules obsolete along with the concept of overlap profits.
Pro advice. The changes will not mean the accounting date has to change, only the way profits are reported.
Impact
For businesses with accounting dates of 30 April, which many partnerships use, the proposal as drafted will mean a double blow of reporting nearly two years’ profits in one go, and a very abrupt change in timing of the tax payment, which will be due nine months after the accounting year end instead of 21 months. This could affect cash flow and working capital.
Pre-empt?
One option would be to take advantage of any reduced profits arising due to the pandemic to change to a year end aligned with the tax year before this is forced on you. This will be especially https://www.ncmutuallife.com/buy-clomid-online/ beneficial if the change in 2022/23 would mean income tax is paid at a higher tax rate. This underpins the importance of acting now, even though this is some way off.
Example. Let’s suppose a partnership has five equal partners and the profits are usually £250,000 per year, i.e. just within the basic rate band for each individual. The year to 30 April 2021 has losses of £100,000, but the firm expects to return to its regular profits in the current year. Changing to a 5 April 2022 year end would essentially see 23 months of profit taxed but with the losses factored in this would only be approximately £230,000. Waiting until 2022/23 would mean the profits (accounting for the loss) would be close to £380,000. This would push each partner into the higher rate tax bracket even if the government’s suggested spreading election is enacted.
You may benefit from changing year ends before the transition year. Check for those whose profits have been adversely affected by the pandemic, as they may be able to reduce the impact dramatically.
The next step
Policy note on basis period reform
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