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Nothing seismic will be experienced yet but profits being earned now by such businesses are going to be governed and taxed according to the new rules.
We are not describing the new tax year basis of assessment here. Let’s take them as read by the audience. Instead, we will consider the present and near future and look at the issues many practitioners will be confronted with.
Why not change?
There is an assumption in HMRC’s statements that most businesses who do not have a 31 March or 5 April year end currently will move to do so now.
However, there are many who cannot (or will not) change for various reasons:
What are the key problems?
These are twofold:
Let’s look at 2024/25, within the new basis period rules for a UK LLP within a large international firm with a 31 August accounting period end.
Results? Estimates, provisional figures, lack of certainty, partner tax underpayments and repayments resulting, considerable extra work and administrative burdens and catch-up payments – all a part of the new system.
There is no ‘cure’ for this – these are the rules. April 2022 ‘provisional figures’ paper shared with some stakeholders offered some ‘easements’ In summary the easements were:
The paper also covered other potential solutions as an ‘aside’, comprising:
The paper is reasonably clear on which alternatives HMRC does not prefer. For example, it warns that option 3 might become a source of tax ‘leakage’ with businesses planning to delay tax into a later year, or else it points to the complexity of excessively altering primary legislation in options 2 and 3, and in a, b and c which may take a long time to fully bed in.
In discussions with HMRC, it seemed to lean towards Option 1.
Does option 1 help? It gives certainty. We know what we have to do to adapt. It is relatively simple to effect the change as it’s only an extension of current practice.
What does it not solve?
Some of these are easily stated:
Does estimating create new issues?
Yes, it will. Further consultation may be needed in this area.
One of the main difficulties for large partnerships is the matter of profit-sharing arrangements. None of the options really addresses this.
For example, the large partnership with its August year end may well arrive at an accurate estimate of the overall assessable sum for 2025/26 before 31 January 2027 (but an estimate nonetheless).
However, the division of the profit where there are typically large discretionary elements in deciding the split would not be ascertained until after January 2027 – perhaps as late as March or April.
While the overall amount to be assessed might be known, there could be widely divergent individual differences for partners between the earlier and later year. Partner X might have a profit share of £200,000 in the earlier year. A reasonable view for the provisional/estimate for the following year to meet the January 2027 deadline would be to use that as a base. However, in the profit-sharing discussions, her profit share in the latter year is upped to £1m.
Conversely Partner Y in the same process may see profit share reduced by the same amount.
Although the partnership profit as reported could theoretically be 100% accurate , in practice you will have these swings in individual tax liabilities.
This could create rich enquiry pickings for HMRC. It inevitably creates interest charges even though overall, in the end, the correct amount of tax will have been paid.
The rate of interest paid by HMRC on tax overpaid is base rate minus one whereas the rate for tax underpaid is base rate plus 2.5. So there is always a differential of 3.5 points even when the right amount of income has been assessed overall and all tax has been paid on time.
HMRC have indicated that if the approach is disclosed and they deem it ‘reasonable’ then the risk of enquiry will be minimised or even extinguished. Their Business Income Manual may well be amended to record this.There does not appear to be a solution to the interest issue. This is likely to represent an additional charge to the partnership.
At the end of the exercise…?
We wait to see which easement route is adopted, although the assumption at time of writing is ‘option 1’ which HMRC sees as the least disruptive. It is of course possible that no easement at all will be offered so that we just ‘have to get on with it’.
However, it is still a resource challenge – particularly if the partnership is itself an accountancy business dealing with a raft of clients who have altered year ends or need guiding through transition and beyond – creating a lot of additional work for possibly no commensurate reward.
Written for ICAEW by Simon Girling, Senior Tax Manager
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Please get in touch if you would like to speak with one of our tax specialists on how best to prepare for the Basis Period Reform.
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