For example, if your business draws up accounts to 28 February, your 2024/25 [Year 1] taxable profit will be based on 11 months’ worth of profits from the accounts to 28 February 2025 and 1 month’s worth of profit from the accounts to 28 February 2026.
The problem is that your tax return will need to be submitted by 31 January 2026, a month before the later accounting period ends, let alone has generated an agreed set of accounts. HMRC estimate that you will be one of around 300,000 taxpayers who will have to do submit provisional figures and then adjust them once actual figures are known.
To start with, you will have to include a ‘best estimate’ figure on your return. HMRC are clear that they will not issue specific rules about how to prepare that estimate – you will have to make that judgment and they will be able to challenge it if they consider it unreasonable. However, they do recognise that having to make an amendment will entail a lot of additional work for all sides, so have issued a Technical Paper for stakeholders setting out different ways in which the adjustment could be made.
What are the options?
The current rules are that if you include provisional figures, you must amend them as soon as possible after the actual figures are available, and you have to pay any additional tax plus interest within 30 days of the amendment. Sticking to this rule is a possibility and would not require any changes to legislation or guidance, but neither does it reduce the burden on taxpayers. There may also need to be some clearer definitions of what ‘as soon as possible’ means.
Option 1 is that you could make the amendment within the same timeframe as you can amend the Year 1 tax return, i.e. 12 months after the filing date, and that you could make that amendment at the same time as submitting next year’s {Year 2] tax return. HMRC consider that this is the easiest option to implement from a legal and systems/process perspective, but still means that you will have the increased costs of submitting an amendment.
Option 2 is that the deadline for submitting your Year 1 return would be extended to give you more time to prepare the later set of accounts, so that you would not need to submit a provisional figure at all. HMRC consider that this would require a lot of change to legislation and to systems but would reduce the burden on many businesses. Although not stated in the technical paper, there would presumably have to be some form of deadline or tax return submission would be delayed indefinitely. A variant of this option would be to set tax return filing dates based on the accounting date of your business, as is the position for companies. HMRC consider that this variant does present some problems so would only want to implement it if the benefits outweighed what they think are significant challenges.
Option 3 is to allow you to make any adjustments in the Year 2 tax return, removing the need to amend the Year 1 return at all. Although this removes the administrative burden for businesses, it would mean that the Year 1 return never reflected actual profits earned in that tax year and could be open to abuse so that tax payments are delayed. A variant of this option would be a ‘safe harbour’ approach, whereby adjustments in the Year 2 return would be allowed (or not required at all) if the difference between the provisional and actual amount is within a threshold, such as 5% of profits. Again, HMRC are concerned that this is a compliance challenge for them and would also offer opportunity for abuse.
Partnerships
All of this is complicated enough for a sole trade business, but you can imagine the complexities if you have a large partnership with tens or even hundreds of partners, with each partner’s return requiring amendment. The government are asking for suggestions on how this could be eased.
What should I do?
You could change your accounting period end – either to a date between 31 March and 5 April, so that you don’t have to apportion profits at all; or to a date which would allow accounts to be prepared in time to have an actual figure to apportion (HMRC suggest this would be feasible for year-ends up to 31 August).
If that isn’t something you want to do, then you will need to be clear on the consequences as in these cases, the new rules are going to have an impact on your tax reporting for the foreseeable future. The best advice is to speak to your accountant well in advance so that you can plan accordingly.