Kevin Read explains why the timing of a change of accounting date needs careful consideration as we move to the ‘tax year’ basis of assessment
The deferral of the introduction of MTD for income tax self-assessment (MTD ITSA) until April 2026 has no effect on the switch to a tax year basis of assessment for unincorporated businesses and LLPs, which will still take effect in 2024/25.
However, the reduction in the threshold at which the top rate of tax applies in 2023/24 may impact on the decision over any timing of a change in accounting date.
Example: Amir changes accounting date
Amir is a self-employed accountant with a 30 November year end. His profits have accrued evenly at £11,000 per calendar month in recent years. His overlap profits brought forward are £26,000 and he has negligible other income. He decides to change his accounting date to 31 March (which can be treated as a 5th April year end under the new rules).
Compare his tax position if he makes the change in 2023/24 or 2022/23.
(a) If he changes in 2023/24 [the transition year to the new regime]
For 2023/24, he will have:
Standard basis period profits (y/e November 2023) £132,000
Transition basis period (4 months to 31 March 2024) £44,000
Less: Overlap profits brought forward (£26,000)
Transition profits £18,000
The transition profits will be spread over five years, so the total taxable profits in 2023/24 will be £132,000 plus 3,600 (i.e., 1/5 (£18,000)) = £135,600.
As top rate tax starts at income of £125,140 in 2023/24, the income tax liability on transition profits will be £3,600 @ 45% = £1,620. Assuming income levels and tax rates are unchanged, this will be the same figure for each of the following four years, so the total income tax liability on the transition profits will be £8,100.
(b) If he changes in 2022/23
There will be no spreading of the additional profits (£18,000) arising in the year due to the change of accounting date, as spreading only applies to additional profits arising in the transition year. The whole of the £18,000 is therefore taxable in 2022/23, taking income from £132,000 to £150,000.
As the top rate threshold is £150,000, the extra income tax liability in 2022/23 will be 40% of £18,000 = £7,200. This is £900 less than the total tax change (over five years) if the change happens a year later.
Options for taxpayers like Amir
Taxpayers with transition profits who have income between £125,140 and £150,000 have the choice of paying less tax by changing accounting date in 2022/23 or (by changing accounting date in 2023/24) paying more tax but spreading the liability over five years. I expect most will opt for the spreading, which will run the risk of still higher liabilities if the top rate of tax increases over forthcoming years. However, in that event, the taxpayer would be able to take advantage of the option to bring more of their transition profits into tax in an earlier year, which can be done by election on the tax return. It is surely unlikely that any government would introduce anti-forestalling rules to counter this.
Class 4 NICs
Above the upper profits limit (£50,270), the Class 4 National Insurance contributions (NICs) rate is 2.73% in 2022/23 and 2% in 2023/24.
Assuming the latter rate remains unchanged as the transition profits come into charge (if the change of date happens in 2023/24), Amir’s income tax saving of £900 by changing date in 2022/23 is offset to some extent by extra Class 4 NICs payable of £18,000 @ 0.73% = £131.
Practical tip
Taxpayers should carefully consider the timing and effects of any change in accounting date, especially where they have income between £125,140 and £150,000.
