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Accounting Basis Period Reform update

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We are now less than two months away from the start of the tax year, which will see a significant change to the way that profits are taxed for all practices that currently have any accounting year end other than 31 March or 5 April. In many cases, the change will result in an acceleration of tax liabilities.

Currently, such practices are taxed based on the profits for the accounting year ending in the tax year. For example, if the practice has a 30 June year-end, the 2022/23 tax position will be based on the 30 June 2022 accounts.

From 2024/25, all practices will be taxed based on the results for the tax year, with an apportionment required where accounts continue to be prepared with anything other than a 31 March or 5 April accounting year-end. It is expected that most practices will simply change their accounting year-end to either 31 March or 5 April.

The 2023/24 tax year, which starts this April, will be the transitional year. Once again using a 30 June accounting year end as an example, in 2023/24 individuals will be taxed on the profits for the year ending 30 June 2023 plus profits for the period 1 July 2023 to 5 April 2024, less “overlap relief”. Overlap will generally have been created when a partner or sole trader first started in business. It relates to a period of profit that was taxed twice in the early years of business. If that period was some time ago, the value is likely to be lower than current profit levels.

For many, this transitional adjustment will increase the taxable profit for 2023/24, and provisions will be in place to allow the spreading of this additional taxable profit over a period of up to five years.

However, if an individual ceases in business during that period – this includes moving to a different partnership – all the remaining balance will become taxable in the tax year of cessation. This change may push profits into a higher tax rate. If you are affected, your usual BHP contact will be in touch to discuss the impact of these changes and any action that needs to be taken, but if you have any concerns in the meantime, please contact us on 0333 123 7171.