What are the changes?
On 20 July 2021, HMRC announced a consultation on income tax basis period reforms. The consultation, together with new legislation, sets out the way in which self-employed partners’ taxable profits are subject to income tax and Class 4 National Insurance Contributions, with effect from the tax year commencing 6 April 2023.
It is essential that you are aware of the implications, particularly if you are responsible for making tax payments to HMRC in settlement of your tax liabilities each year. Currently, basis period rules identify the taxable profits to be reported on your tax return. For established partners, the taxable profits are currently those covering the 12 months of the accounting period ending in the tax year.
Who is affected?
Self-employed partners in partnerships with non-31 March/ 5 April accounting year-ends will be subject to new rules from the 2023/24 tax year. New self-employed partners are defined as those who started self-employment in the 2021/22 or 2022/23 tax years, and are outside the scope of the changes.
How it will work
2023/24 tax year – transition year
You will be taxed on the following profits:
- profits for the 12 months beginning immediately after the end of the basis period for the 2022/23 tax year. In most cases, this will be the profits for the 12 months ending in the 2023/24 tax year; PLUS
- profits for the period starting immediately after the end of the period in (a) above to 5 April 2024; LESS
- any existing overlap profits.
‘Overlap profits’ are profits that were taxed twice due to the current opening year rules, which were applied when you first became a partner. As a result of business growth and inflation, the value of overlap profits are diminished over time. We expect that in many cases the overlap profits will be less than the additional profits that will be brought into charge.
2024/25 tax year and beyond
You will be taxed on the profits arising in the tax year, using an apportionment of relevant taxable profits from accounting periods which cover the tax year. Apportionments are usually done on a monthly or daily basis, but in some cases other methods may be appropriate.