Proposed change to tax basis periods affecting non-March year end practices

The government has announced a proposed change to the way profits are taxed for unincorporated businesses that do not use a 31 March or 5 April accounting year end.  In 2022/23 those businesses, which includes GP partnerships, will be taxed on the profits for an extended period, less any overlap profits brought forward.  The move is designed to simplify the tax system but also to make the transition to Making Tax Digital, a long-held government aim, more easily achievable.

There is no requirement to change the accounting year-end of the practice, just the way profits are taxed.  That, however, would just seem to confuse matters, so we envisage that accounting year ends will change to 31 March .

We anticipate that the change will be effected through the Finance Bill in due course

Impact

A worked example may best demonstrate how this works.  Imagine a practice has a normal accounting year end of 30 September.  In 2021/22 that practices’ partners will be taxed upon the profits for the year ended 30 September 2021, for all partners who have been continuously in the practice during the 2021/22 tax year

In the following year under the new rules those partners will be taxed on the profits for the year ended 30 September 2022 plus for the period 1 October 2022 to 31 March 2023.  The overlap profits brought forward from when a partner first joined the practice, or when self-assessment was introduced for older partners, are then deducted as follows:

2022/23
Year ended 30 September 20221000,000
Period 1 October 2022 to 31 March 202350,000
Total150,000
Less overlap profit brought forward(20,000) 
Taxable profit130,000

As you can see, there may be quite an impact on cash flow if you are normally being taxed on profit of £100,000 and now you are being taxed on £130,000.  This is because there is no inflationary increase applied to  the overlap profits which may have arisen many years previously from lower profits.  No allowance is given for that in the calculation.  What the government has announced, however, is that the additional profits that become taxable as a result of this change, £30,000 in this case, will be taxed at £6,000 per year over the 5 years 2022/23 to 2026/27, which eases cash flow issues.

It may be that overlap profits are considerably higher than stated above.  If a partner only joined the practice in, say, 2019/20, their overlap profits will be based upon much more current earnings.  They might even be greater than the extra earnings being taxed for the extended period.  If that is the case, there is a provision that allows the 5 years spreading of taxation to be disapplied.

Pensions

Since the introduction of the new GP contract in 2004, there has been a direct link between taxable NHS profits and NHS pensionable profits.  A corresponding change to the pensioning of profits would therefore seem probable.  It is not known at this stage, however, whether spreading provisions would be acceptable to NHS Pensions.  It may be prudent to include somewhat higher figures in the Estimate of Pensionable Profits to cater for some of the increase, but more will follow on this in due course as things develop.

Further information

If you would like further information, then please contact David Walker, Senior Tax Manager – Healthcare Services on 01253 404404 or email david.walker@mooreandsmalley.co.uk