While MTD has taken the headlines, a different set of rules could see your clients (and even some practices) hit by an extra-large tax bill.

 

While there’s been much focus on the reporting impact upon the smallest businesses from Making Tax Digital (MTD), there are other impending rule changes that require focus.

Basis Period Reform seeks to ‘remove complication’ by aligning sole trader and LLP tax filings with that of the tax year itself. Taxable profits will need to be reported from April 2024 for the period up to 5 April – even if they have a different accounting year-end.

But, while there has been the threat of MTD being a step towards HMRC collecting tax earlier, the Basis Period Reform could be a cash nightmare for some small businesses. With 2023/24 being a transition year, businesses with a year-end that fails to match the tax year-end will have to ‘catch up’. In other words, those with an end-of-April year-end could be taxed on 23 months of profit.

The communication game

This impending change isn’t ‘a new thing’, but there’s no doubt it’s crept along (and with little debate or publicity) since announced in 2021.

Certainly. Many practitioners have been looking to change accounting periods for some affected already and help them manage their new tax bills. Others will be aware of ‘overlap relief’ and the ability to spread the extra tax due over five tax years – but still, it’s a potentially big negative impact on cash positions.

But I do wonder if practices have done enough to warn their clients – and that practitioners operating within LLPs themselves are aware of the potential difficulties that these accelerated tax payments (and/or shifting their accounting period) may have on any partner payouts. Or… what if the reliefs and mitigations happen during a period that partners are retiring?

A heady mix

Without delving further into the technicalities, it’s a heady mix of potentially revised reporting, alongside ‘fiddly’ tax advice and cash management. And then there’s the fact that it may impact many practices directly.

The reality is, there has already been work for accountants to undertake; and, by definition, for us at AdvanceTrack – with more in the pipeline. But can practices price in, or even keep track of, this ‘extra’ work? And if so, are you prepared to do so?

Vipul Sheth is founder and MD of AdvanceTrack

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