Basis period reform: what does it mean for your farming business?

From 6 April 2023, HMRC implemented reforms to the basis period method of assessment which will affect all sole traders, partnerships and LLPs that currently do not prepare their annual accounts to a year ending between 31 March and 5 April.

The previous basis period rules

Under the previous rules, all unincorporated businesses were assessed on profits earned in the accounting year which fell within the tax year.

For example, Farmer A prepares his accounts for the 12 months ending 30 November, meaning the 2022/23 taxable profits would be based on the accounts for the year ending 30 November 2022.

The new basis period rules

From 2024/25, all unincorporated businesses will be taxed on the profits generated between the start and end of the tax year, from 6 April to 5 April, regardless of the year-end that the business prepares its accounts to. HMRC will allow businesses with a 31 March year end to be treated as if it were 5 April so no adjustments will be required.

For example, if Farmer A continues to have an accounting year-end of 30 November, he will have to apportion profits from two accounting periods to fit into the tax year. Also, if the accounts have not been finalised prior to the tax return filing deadline, then estimated profits will have to be included leading to further administrative hassle and cost.

The 2023/24 transition year

2023/24 will be the transitional year, with individuals potentially taxed on a long period of account ending 5 April 2024. Relief will be given for any existing overlap profits (profits historically taxed twice on either commencement or due to the transition to the self-assessment regime). It is important to accurately identify these any overlap profit to ensure maximum relief is obtained and you should speak with your accountant as soon as possible.

In the above example of Farmer A’s ongoing 30 November year-end, the tax return for 2023/24 will have to include profits for the 12 months ended 30 November 2023 plus profits for four months ended 5 April 2024.

Transitional profit spreading

To help minimise the potential tax liability and cash flow impact there are rules that allow transitional period profits to be spread over five tax years, beginning with the year of transition. The table below shows Farmer A’s standard period and transitional period profits that will be included in their 2023/24 tax return.

While the taxable profits under normal rules for the 2023/24 tax year would have been £100,000, the new rules see taxable profits of £135,000. The excess profits of £35,000 can be spread across five tax years, with an additional £7,000 taxable over the five years from 2023/24 to 2027/28.

Many businesses may opt to change their year end to 31 March to avoid further administrative hassle or cost. However farming businesses need to consider the commercial impact of such a change as the 31 March will be a particularly busy time for many arable and livestock farms. The quality and timeliness of supplying annual books and records may need to be improved to ensure accounts are completed prior to the reporting deadline. All unincorporated businesses will only have 10 months to prepare their accounts and pay the tax, whereas historically a business with 30 April year end would have 21 months to do this.

The impact will be most felt by businesses with a current year end early in the tax year (April onwards) given the transition profit period will be c.11 months. Even after allowing for the spreading provisions they could still see a significant increase in their taxable profits.

Finally, accountants may also see the pattern of their work shifting due to the changes resulting in it possibly taking longer to deliver 31 March year end accounts.

Time to prepare

As can be seen in the above Farm A examples, the changes are far from straightforward and could lead to added complexities and tax. With less than a year until these changes come into effect, now is the time to prepare and check what impact they will have on your business. To discuss your circumstances, please get in touch with our EQ Agriculture team via agriculture@eqaccountants.co.uk or call your local office contact.