Income Tax: Basis Period Reform for GP partners

From April 2024, the way in which partnerships and self-employed individuals are taxed under self-assessment is changing. It will affect those who currently have an accounting year-end that doesn’t align with the tax year of 5 April or 31 March.

What are the current rules?

Under the current rules, partnerships or sole traders can choose whatever date they wish to draw up their annual accounts. That accounting year-end date determines in which tax year those profits are assessed for tax. For example, an accounting year ended 30 June 2022 will be taxed in the tax year ended 5 April 2023, since it falls within that tax year. An accounting year-end of 31 March 2023 is aligned with the tax year-end, and so is also taxed in the tax year ended 5 April 2023.

When a partner joins a partnership, they’re brought into the current tax system under the opening year rules. During these early years, the partner will be taxed on profits twice. For example, if a practice has a 30 June year-end, this is nine months behind the tax year-end. Therefore, the incoming partner will be taxed on nine months of profits twice. These twice taxed profits are known as overlap profits.

Over their lifetime in the partnership, an individual will only ever pay tax on profits once, since those overlap profits are relieved (deducted from profits) when the accounting year is moved closer to the tax year-end or they retire from the business.

Partners will all have different overlap profits as they are determined based on their profit share in their opening years.

What’s changing?

From April 2024 everyone will pay tax on 12 months of profits to the end of the tax year – to 31 March/5 April.

This means that all those with non 31 March/5 April year-ends will relieve their overlap profits in the transitional year, 2023/24.

It doesn’t mean that businesses have to change their accounting year-end date. However, if they continue to keep, for example, a 30 June year-end, then their tax return will take three months of profit from one set of accounts and nine months from the next set of accounts, so that they are assessed on a tax year basis.

What does this mean for my tax bill?

Overlap profits were created when an individual joined the practice or when self-assessment was introduced in 1995/96. Overlap profits aren’t uplifted for inflation so they’re unlikely to represent current profit levels i.e. six months of profits when you joined the partnership may be less than your current six months of profits especially if you joined a partnership on a reduced parity share or on fewer sessions than you’re working currently.

Accordingly, when you move to this new tax basis, you’ll have an advancement of tax that otherwise wouldn’t hit you until you left the practice or retired.

HMRC do recognise that, when these new rules are implemented, you could pay significantly more tax. Therefore, you’ll be able to spread the excess profit over your current year profits, over five years to help cash flow.

The five-year spreading of additional profits is only available in 2023/24.

However, there’ll certainly be some other problem areas to consider.

1. The five-year spreading could affect your tax rate band for the following five years i.e. loss of personal allowance, putting you into a higher tax band.

2. Accounts may need to be finalized earlier to allow tax returns to be submitted, or estimated figures may need to be used and subsequently revised.

3. The annual allowance pension tax charge has been an issue for a number of years, affecting those whose taxable income is above a certain threshold. Although that threshold has been increased, the basis period reform may mean an increase in taxable pay, which could give rise to a higher than otherwise pension tax charge.

4. The calculation of pensionable pay for GP partners follows the tax treatment i.e. if you have a non 31 march/5 April year-end, then you’ll be paying pension contributions in arrears and have notional pensionable pay overlap profits recorded on your pension certificate. If NHS Pensions move the calculation of your pensionable pay in line with tax legislation, then this could also give rise to additional pension contributions becoming due. With a rise in pensionable pay for 2023/24, this in turn may have consequences of higher pension growth and therefore impact annual allowance pension tax charges. NHS Pensions haven’t released information on whether they’ll also allow the five-year spreading.

Need help?

If you have any concerns regarding the information discussed in this article, or have any other questions, please get in touch with your usual Larking Gowen contact or look for contact details in the Our People section of the our website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Jamie Butcher