HMRC 2024 basis reforms – what farmers need to know

April 2024 will see the introduction of a law which affects how sole traders and partnerships are taxed.

From 6 April this year, businesses will be taxed on profits generated in a tax year, rather than those aligned to their accounting year end.

See also: Company accounts reform- what it means for farm businesses

This change to what is known as the basis period affects anybody who is self-employed – sole traders and partnerships – and where the accounting year falls other than between 31 March and 5 April. Companies are not affected.

Andrew Robinson, of accountant Armstrong Watson, explains the implications of the change and answers key questions.

When does this take effect?

The current tax year 2023-2024 is a transitional year, but there is still time to look at the issue and take action if needed.

The problem arises when tax returns for the year to 5 April 2024 have to be submitted. This can be done any time until 31 January 2025.

As things stand, a business can choose any accounting year end, so for the tax year ended 5 April 2023, this could be any date between 6 April 2022 and 5 April 2023.

The change affects the taxation of profits made in this transitional year, so that regardless of what the accounting year end is, tax will be charged on the profits generated in the year ending 5 April 2024.

The change in basis year brings about little benefit for the taxpayer, but means that tax receipts by HMRC will be accelerated, so there will be cash flow issues for many businesses.

Do I have to change my accounting year end?

There is no requirement to change the year end. But if you decide to keep a year end other than 31 March – 5 April, when you get to submitting your tax return for the year to April 2024, and the accounts for the second part of that period have not been completed, an estimated profit will have to be put on that tax return.

Then it will be a case of going back and correcting it once you know the actual profit. The examples below highlight the effect on businesses with different year ends:

June year end

When doing the 2024 tax return, the profit that will need to be declared will be made up of two parts – three months of the 2023 accounts (up to June 30) and nine months of the June 2024 accounts.

The June 2024 accounts could be ready before the tax return has to be submitted in January 2025. It is fine to keep a June year end, but it will make the completion of the tax return more complicated every year.

October year end

Those with an October year end will have a very short window to do the October accounts and get them properly put on the tax return before the end of January.

If the accounts are not complete in time for the tax return deadline, then estimated figures will have to be used. Then, once the accounts are complete, the tax return will have to be revised.

February year end

Those with this accounting date will have 11 months of actual figures and one of estimated figures, so there will be less of an impact, and it should be possible to get the profit estimate for that final month fairly accurate.

Using estimated profits has some consequences. First, it is more hassle and expense to effectively do the tax return twice.

There is also more risk of underpaying or overpaying tax.

If the updated profit in that set of accounts turns out to be higher than estimated at the point when the tax return is filed, it’s likely that tax will have been underpaid, and there may be an interest charge.

Therefore, those with a year end falling in October or later should consider changing to a 31 March year end.

Practicalities of keeping the current accounting year end

There is no obligation to change, and a particular year end might suit a business both commercially and practically.

For example, a 31 March year end may not suit a beef and sheep farmer, who wouldn’t welcome the prospect of doing a stock count in the middle of lambing.

Will the timing of a big plant or machinery purchase have an impact in this transitional year?

Anyone considering buying a new tractor or other equipment that qualifies for capital allowances this spring could find it would be financially beneficial to buy it in March, rather than April if they are going to change their year end.

Otherwise they would only be able to claim a proportion of their capital allowances.

How will pension contributions, made to reduce taxable income, be affected?

Those making pension contributions will have to make an educated guess as to how much to invest in their pension if their year end falls outside the 31 March to 5 April period.

The better their management information is, the more informed that guess will be.

Even with good, up-to-date accounting software, the accounting profit depends on any difference in stock for the current year compared with the previous year, and also how much machinery has been bought compared to the last.

It’s not a case of relying on the accounting software to figure out how much pension contribution to make, as it can be quite tricky to forecast.

How long until taxpayers must make a decision on changing their accounting year-end?  

The figures need to be looked at in detail before the next tax filing season ,and well before the 31 January 2025 deadline, so they need to look at it as soon as possible.

For anyone thinking they may change their accounting date to 31 March, it would be wise to get some stock figures up to then, so they are available if needed. This will offer more flexibility.