Is your professional partnership prepared for the tax-year basis change?

The UK Government is changing the way that trading profits are taxed for income tax purposes, starting in the 2024/25 tax year.

This change affects self-employed individuals and partnerships whose accounting periods don’t line up with the tax year as under the tax-year basis, tax will be calculated on profits arising in the tax year, rather than being paid on profits in the accounting period that ends in the tax year.

We are currently in the tax year of transition (2023/24), where taxable profits will be calculated based on profits in the accounting period ending in the tax year plus profits to 5 April 2024. Partners could pay income tax and Class 4 NICs on up to 23 months’ profit in 2023/24 for a 30 April year end.

An automatic ‘spreading’ rule will apply and will increase the tax payments of most partners for the next five tax years. Advance planning is essential to minimise taxable profits in 2023/24 and to assist firms in meeting the cash flow to fund the additional tax payments over the next five years.

The impact on cashflow

In effect, the UK Government are accelerating the tax charge on the profits of any partnership or sole trade business with a non-31 March or 5 April accounting period by taxing profits to 5 April 2024.

For a professional practice with a 30 April 2023 year end, this means that most partners will be taxable on profits for the 23-month period from 1 May 2022 to 5 April 2024 in the current tax year.

The transitional tax charge is calculated in 2023/24 and the tax will automatically be spread over five tax years, although partners may decide to opt-out and suffer a one-off tax charge in 2023/24 to preserve their allowances in future years.

In any event, professional practices must act now to ensure that their firm has sufficient cash to meet the additional tax that will be payable by the partners.

How we can help

We act for many professional practices and our EQ Professions Team are on hand to provide expert advice on the new rules by –

• Assisting with tax planning in the 2023/24 tax year, which will be more important than ever for professional service firms, to reduce the impact of the transitional tax charge.
• Providing tax forecasts for partners to allow a decision to be made whether to spread the tax over five tax years or to pay the transitional tax on 31 January 2025.
• Advice on improving cash flow and reducing partnership ‘lock up’ by focussing on more regular billing of work in progress and collecting debts from clients.

If you would like to discuss the impact of this significant change in the taxation of partners and sole traders, please contact our EQ Professions team at professions@eqaccountants.co.uk or by calling one of our offices.