Since the introduction of self-assessment in 1996, income tax has been based on the accounting period of a business. Each business could choose the date to which they drew up their accounts. While for many businesses 31 March or 5 April seemed fine, this was not the case for all businesses.
Many farmers have chosen to have a year end that ties in with their farming, whether that is a September year end, after harvest, or a December year end to tie in with bulk calving in the spring.
While this has given the added benefit of giving more time to assess income tax liabilities, it has also given rise to different calculations to tax in the first and last years of trade.
HMRC now deem this to be unfair and complicated. HMRC are proposing to change the way in which tax is calculated. HMRC did listen to various professional bodies and have delayed the change. The changes were originally from 1 April 2022, and this will now be delayed a year. Under the new rules the tax will be calculated on a tax year basis and not an accounting year.
For those businesses with a 31 March of 5 April year-end, there will be no difference in the tax liabilities. However, for businesses with a different year-end, this could lead to substantial tax rises. This is due to being taxed from your last accounting date to 31 March/ 5 April in one year.
For example, if you had an April year-end, your tax return for 2022/23 would be based on the profits to 30 April 2022. In 2023/24 you would be taxed on the profits from 1 May 2022 through to 31 March 2024.
This is 23 months of profit.
While doing this, you will be able to relieve any overlap profits. It is often the case that profits increase over time and when a business starts, the profits are not so high.
Looking at the above example with some figures, say in the first year of trade the profits were £24,000, however, the business has now grown and is now making £48,000 profits each year. The business would have overlap profits of approximately £22,000. In the final period of trade, it would be taxed on approximately £70,000 of profits, after the relief of £22,000.
As you can see in this example, where profits have increased, if the basis periods did not change, the individual would remain a basic rate taxpayer.
However, if the proposed changes are brought in, taxing on the tax year instead of the accounting year, there would be tax due at the higher rate of tax.
While there could be some mitigation in reducing the tax liability, with HMRC suggesting spreading the increased profits over five years, this could still lead to more tax.
For some farmers, five-year averaging may be available, however, while this could keep individuals as basic rate taxpayers, it would still increase tax liabilities and worsen cashflows as payments on account would also likely increase.
If businesses with an accounting year end other than 5 April or 31 March continue with their alternative year end one would be required to estimate their profits for the tax year each year, unless a second set account are drawn up to the tax year. Where this happens, the effect for 2023/24 is the same, however, going forward profits would have to be time apportioned to the tax year. Therefore, if you have a December year end, profits will have to be estimated from 1 January to 31 March of each year to complete the tax return. Once figures are finalised, amended returns will need to be submitted. This could give some scope to reduce the larger profits in 2023/24.
All of this is under consultation with HMRC now and no final policies have been confirmed. However, it is likely to happen and there is very little time to plan for this. While there is no definite issue yet, if you are a profitable business with a non-31 March/5 April year end, you may want to consider planning cash flow, or other opportunities to mitigate your tax liabilities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
