Kevin Read explains the planned changes to the use of estimated figures as we move to a ‘tax year’ basis of assessment for unincorporated businesses and LLPs.
The switch to a ‘tax year’ basis of assessment grows ever closer. On 6 April 2023, we entered the transition year, which will impact businesses that do not already have a 5 April or 31 March year end.
Under the new system of assessment, applicable for 2024/25 onwards, tax compliance will be much more time-consuming for businesses with year ends other than 31 March or 5 April.
Example
Fred makes up accounts to 31 December each year. When filing his tax return for 2024/25, he will need to assess the profits arising between 6 April 2024 and 5 April 2025. This will involve apportioning two accounting periods on a day-count basis (y/e 31 December 2024 and y/e 31 December 2025), assuming he does not, in the meantime, change his accounting date to 5 April or 31 March (which the new rules allow you to treat as a 5 April year end, thus avoiding having to apportion five days from another accounting period into the tax year).
Estimated figures
The filing deadlines are not changing under the new system, so the 2024/25 tax return must be submitted, at the latest, by 31 January 2026. Fred is unlikely to have finalised his accounts for the 12 months to 31 December 2025 by this date, but the profit figures for that year are needed when filing the return. This means that Fred’s return will include estimated figures.
Currently, businesses must make amendments to provide final figures ‘without delay’ once the appropriate information is available. If the figures originally used were the ‘best estimate’ that could be made at the time, no penalties will be due if the final tax payable turns out to be higher than originally estimated (although interest will be incurred on that extra tax).
A welcome relaxation
This ‘without delay’ condition will be relaxed from the start of the basis period transition year in 2023/24. This follows a consultation last year that looked at ways of easing the administrative burden of having to use estimated figures each year and then subsequently make amendments.
Businesses will be allowed to amend provisional figures within the normal time limits for making amendments. In Fred’s case above, for 2024/25, this would be before 31 January 2027.
This new rule will effectively allow businesses and agents to amend estimated figures at the same time as filing the following year’s tax return of the business. Although this easement is welcome, it will be much simpler still if Fred changes his year end to tie in with a tax year, as this should alleviate the whole problem of using estimates.
Overlap profits
Overlap profits may have arisen on commencements of trade. They will get set off when calculating profits for the transition year (2023/24) or if changing accounting date for tax year 2022/23. Where a taxpayer or agent does not have a record of overlap profits, HMRC can provide details on request if these figures are recorded in HMRC systems.
In the coming months, HMRC plans to provide certainty on ‘overlap relief support’ for businesses looking to:
- change accounting dates in 2022/23; or
-
use overlap relief in the 2023/24 transition year.
HMRC has asked that businesses in this situation (and their agents) wait until HMRC is able to provide further information on the support available before contacting them. This will presumably come over the summer months, well before the filing deadline for 2022/23.
Practical tip
Dealing with estimated figures will greatly increase compliance time for tax returns. Make sure, where possible, that this increased time is reflected in your fee agreements with clients.
