Basis period reform: what GP partners need to know

These changes will affect those who currently have an accounting year-end that doesn’t align with the tax year of 5 April or 31 March. 

Current position 

Under the current rules, partnerships or sole traders can choose whatever date they wish to draw up their annual accounts. That accounting year-end date determines in which tax year those profits are assessed for tax. For example, an accounting year ended 30 April 2022 will be taxed in the tax year ended 5 April 2023, since it falls within that tax year. An accounting year-end of 31 March 2023 is aligned with the tax year-end, and so is also taxed in the tax year ended 5 April 2023. This is known as the current year basis. 

When a partner joins a partnership, they join the current tax system under the opening year rules. This means that during the early years, the partner could be taxed on profits twice. For example, if a practice has a 30 April year-end, this is eleven months behind the tax year-end. Therefore, the incoming partner will be taxed on eleven months of profits twice assuming they joined the practice on 1^st May. These twice taxed profits are known as overlap profits and these profits are noted on record and carried forward until an individual partner leaves the practice. The overlap profits are then deducted from the final period profit for that partner, and this is to ensure that over their lifetime in partnership, they only pay tax on profits once. 

Overlap profits are calculated on an individual basis for partners in partnerships and will be unique to each partner, as they are determined based on when the partner joined the practice and their profit shares over the first few years. 

What is changing? 

The basis of assessment for all self-employed individuals and partners will switch from the current year basis to the tax year basis from 6 April 2024. This change will only affect unincorporated businesses that do not currently prepare their accounts to 31 March, 5 April, or a date in between.

Under the tax year basis, all unincorporated businesses will be taxed on the profits arising in the tax year, rather than the profits that are made in the accounting period that ends in that tax year. Therefore, they will pay profits based on the 12 months ending 31^st March or 5^th April.  As part of the transition process, all those with non-31 March/5 April year-ends will relieve their ‘overlap profits’ in the transitional year which is 2023/24. 

Businesses are not required to amend their accounting period to 31^st March. However, if the business year end is not permanently changed to align with the tax year end, this will mean that estimated figures will need to be submitted each year to HMRC, with a further submission at a later date when the figures can be confirmed. For example, for 30^th September year end, the individual will be assessed on the final 6 month of profits from one September year end and the first 6 months from the next September year end. 

When will we notice this change? 

The transitional year will be the year ended 5 April 2024, which could mean higher tax liabilities for some individuals as they will be taxed on more than 12 months of profits.

Overlap profits can reduce assessable profits in the transitional year, and if this does not eliminate the additional profits taxed then there will be the option to automatically spread the additional profits over five years. 

The business tax return for 2023/24 (submission deadline January 2025) will need to reflect this change. 

How does it impact GPs?

GPs are likely to have higher taxable income in the transitional year, with the first higher tax payment falling due in January 2025.  

Example - Dr. Smith (Single handed GP) makes a profit of £150,000 per year and draws up accounts to 30 September. In 2023/24, Dr Smith will be assessed on:   

Does this mean we should change our year end permanently? 

Perhaps, although there is no obligation on you to do so. 

If you do decide to change your year end to 31 March, it would be sensible to do it when these new basis period rules are introduced, allowing you to benefit from spreading any increased tax liabilities over 5 years.  If you make the change sooner it is unlikely you will be allowed to spread the additional tax liabilities.  

If you decide to retain your business year end as it is, it will mean there are 2 submissions to HMRC required each year; a provisional tax return incorporating a best estimate of the profits and then a final tax return confirming actual profits once the accounts have been approved. 

It will, however, be imperative that you keep your financial records up to date on a timely basis.  As you will have to have up to date information to allow accounts to be prepared for the relevant period ending 31 March 2024.

One of the reasons that HMRC are making this change is because Making Tax digital for personal tax will be enforced from 2025 and quarterly submissions of tax records will be required.  Therefore, ensuring your book-keeping process is slick or outsourcing your book-keeping now will mean you are well prepared for this change.

Further points to consider

• The five-year spread is of the additional profits not the additional tax incurred in 2023/2024 and this means that your tax rate band may be affected in future years, you may lose some of your tax-free personal allowance or be pushed in to a higher tax band. The tax rates could also change from year to year.

• The calculation of pensionable pay for GP partners follows the tax treatment this means that. if you have a non 31 march/5 April year-end, then you’ll be paying pension contributions in arrears and will have pensionable pay overlap profits recorded on your pension certificate. If NHS Pensions move the calculation of your pensionable pay in line with tax legislation, then this could also give rise to additional pension contributions becoming due and there has not been any information released as to whether five year spreading of this pensionable pay will be allowed. 

• A rise in pensionable pay for 2023/2024 may in turn result in increased pension growth which could result in an annual allowance pension tax charge and there has not been any information released as to whether there would be a compensatory scheme to alleviate this additional tax burden.

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