‘Basis period’ reforms will impact on most legal practices

Shaun Mary
Shaun Mary, Partner

The long-delayed HMRC reforms which will see sole traders, partnerships and LLPs assessed for tax on a ‘tax year basis’ are finally due to come into effect in April 2024 – but those practices whose current accounting year-end does not coincide with the tax year need to start thinking about how they are going to cope with the change sooner rather than later.

Shaun Mary, Partner

Under current rules, unincorporated businesses (including LLPs) are taxed on a ‘current year basis’.  Now HMRC wants to ‘simplify’ matters (for themselves, at least) so that the results of any given year are taxed in that year, regardless of the accounting date.

The main driver for this is Making Tax Digital which is due to be introduced for income tax in 2024, but it will also mean that profits will be taxed sooner, which of course has implications for cashflow.

If a practice’s accounting year is anything other than 31st March or 5th April, the 2023/24 tax year will be a transitional year when as much as 23 months’ worth of profit will be  taxed and from 2024/25 practices will need to report the taxable profits for that tax year, regardless of the accounting period year end.

There are several issues that affected practices will have to consider, amongst which:

  • Profits might have to be estimated and then revisited once the accounts are finalised causing additional administration (and costs) preparing or reviewing a later set of accounts every year.
  • Overlap profit for each member/partner needs to be researched as it can be used to reduce personal tax payments, though it is often relatively small.
  • If profits in 2023/24 are higher than usual, this could have a compounding impact on tax bills and cashflows.
  • Additional profits brought into charge are spread over the 5 tax years beginning 2023/24, however a practice can elect not to spread.
  • Those practices maintaining tax reserves ought to ensure they are holding enough behind from profits to support future increased tax payments.

One obvious solution is to change a practice’s accounting year end date to coincide with the tax year end.  There are special rules about doing this, so taking advice is essential – and timing of the move is also important.

April 2024 may seem a long way away, but these are significant things to think about, and it really is no good waiting until the last minute.  Every practice whose accounting year end is not 31st March or 5th April needs to take professional advice sooner rather than later.

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