Income Tax Basis Period Reform – call to action!

Category: ProfessionsTaxation - Posted On: Oct 5 2022

From the 2024/25 tax year, all business profits subject to income tax will be assessed on profits arising in the tax year rather than profits in the accounting period ending in the tax year.

Don’t be fooled into assuming 2024/25 is far enough away to put this on the back burner. The change actually commences in the transitional year of 2023/24 which is now little more than 6 months away.  If you don’t plan soon and take appropriate actions you may be faced with a significantly higher tax liability than anticipated.

In 2023/24 the transitional period taxable profit will be:

  • The standard part – the existing accounting period, plus
  • The transitional part – the period from the end of the accounting period to 5 April 2024, less
  • Any overlap profits brought forward

Where the ‘transitional part’ profits exceed the available overlap profits there is an option to spread the additional tax over five years and where overlap profits exceed the ‘transitional part’ profits the resulting loss may be treated as a ‘terminal loss’ and set against profits from the same trade in the previous 3 years.

Businesses not currently preparing their accounts to 31 March (or 5 April) will have less time to prepare their accounts and will also have to apportion profits over 2 accounting periods unless they change to a 31 March (or 5 April) year end.

For example, a professional practice LLP with 5 members has taxable profits of £1m in the year to 30 April 2024 with the anticipation that profits will increase by 20% to £1.2m in the year to 30 April 2025. The 5 members have a combined overlap relief of £250K.

The increase in taxable profits is £850k with resultant additional tax and NIC of over £400k. The additional profit of £850k could be spread over 5 years at £170k pa from 2023/24.

Informed decisions should be made sooner rather than later including:

  • Consider changing accounting date to 31 March 2024
  • Review availability of overlap relief
  • Estimate additional taxable profit and tax payable in 2023/24 and in the following 4 years if the spreading option is chosen
  • Assess whether additional transition profits should be spread evenly over 5 years from 2023/24 or alternatively whether an election should be made to accelerate some or all of the transition profit
  • Assess the impact on cash flow and working capital and plan accordingly

Our EQ Professions can help to determine the impact of the basis period reform on your business including the preparation of projections and appropriate courses of action.

If you would like to discuss how we can help your business prepare for the income tax basis period reform, please email or by call one of our offices