Kevin Read takes solace in classic soul music as he considers a change in accounting date prior to the introduction of the tax year basis of assessment.
Most unincorporated businesses that do not have a 31 March or 5 April year end should be encouraged to change their accounting date before 2024/25, when the new ‘tax year’ basis for assessing profits will be in place.
If they do not, their future tax returns are going to require the apportionment of profits from two different accounting periods, probably with estimated figures (that will require subsequent adjustment) being used from the latter period.
Many small practitioners have clients who are partners in large professional firms. These firms may decide to stick with their existing year end (which is often 31 December, particularly if the firm trades internationally), so ongoing apportionments will remain likely for such clients.
Get ready
If a change of accounting date is made in the transition year (2023/24), the extra profits assessable that year (after deducting any overlap profits that the business is carrying forward) will be ‘transition profits’, meaning that they will:
- automatically be spread over five years, starting in 2023/24 (with the option to elect out of the spreading in any year so as to bring extra profits into charge early); and
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be excluded from the definition of ‘adjusted net income’ (ANI), which is used for determining personal allowance abatement and whether any high-income child benefit charge is payable.
In contrast, if the change is made a year earlier (in 2022/23), any additional profits after deduction of overlap profits will be fully chargeable in that year and included in ANI. Unless profits would otherwise be unusually low in 2022/23, changing in 2023/24 is clearly more tax-efficient and better for cash flow.
Ain’t that peculiar?
Under the existing current year basis rules, if an accounting date is to be changed from (say) 30 November to 31 March, this could be effected by preparing a long period of account for the sixteen-month period or by preparing two separate sets of accounts, for the year ended 30 November and the four months to 31 March.
As the former option would then (for tax purposes) involve time apportioning the 16-month period’s profits after capital allowances into 12-month and 4-month periods, these two methods produce rather different results. There would be no time apportioning if separate accounting periods are chosen and capital expenditure would be allocated to the period in which it is incurred.
Ball of confusion
When changing the accounting date, there seems to be nothing in the transition year provisions (FA 2022, Sch 1) to prevent either preparing separate accounts or apportioning one long period of account, whichever is more beneficial. If two separate accounts are prepared and expenditure on plant is incurred in the 12-month period, the capital allowances will reduce profits that are not eligible for spreading and will reduce ANI.
However, as periods of account exceeding eighteen months are not recognised as a change in accounting date for tax purposes (ITTOIA 2003, s 217(3)), those with current accounting dates early in the tax year will need to prepare two separate sets of accounts to effect a change.
With the split between normal and transitional profits in 2023/24 being so important, some clarification on these basis period issues from HMRC would be welcome.
Practical tip
The tax year 2024/25 may seem a long way off, but the transition year basis period for traders with a 30 April year end begins on 1 May 2022. Whether, when and how to change accounting date is something that should be being discussed urgently with clients. Be prepared for lots of questions as the rules are complex!
