What are the changes? Each year self-employed individuals and members of partnerships are charged Income Tax on the profits arising from their business activities. Ordinarily HMRC tax the profits arising in the accounting period ending within the tax year. However, these rules can be complex, especially in the opening years of a business. It can also lead to a time-lag between profits being earned and when tax is due. In the example above, tax won’t be paid on the profits for the period from 1 July 2021-30 June 2022 until 31 January 2024. The changes will take place in the 2023/24 tax year and this can lead to farmers paying tax on more than 12 months of profit in one tax year. This is because an individual will be taxed on their normal accounting year basis as well as the period following the end of the accounting year to the 31 March/5 April 2024. For a partnership with a June year end, in the 2023/24 year the partners would be taxed on the year to 30 June 2023 as well as the profits for the period from 1 July 2023 to 31 March 2024. This is effectively taxing 21 months’ worth of profits in one year. Any ‘overlap’ profits generated in the past, due to basis period overlapping and being taxed on the same profit for than once will be offset, however in many cases these are much lower than current profit levels. Take an example of a partner who has an annual profit share of £80,000 and the partnership accounts are drawn up to 30 June. The overlap profits brought forward are £10,000. The tax payable in the 2022/23 and 2023/24 tax years would be as follows:
Planning is Key Given the changes do not take affect until the 2023/24 tax year, there are still opportunities to undertake some planning in order to reduce the impact of the changes. While loss relief may be able to help, with many businesses having suffered COVID related losses in recent years, in many cases any available losses have already been utilised to produce much needed tax savings. Similarly, averaging could be beneficial to assist with changeable profits, especially with the impact of the reduction in subsidies. Expenditure However, the one key area where the most reduction can be achieved is by businesses ensuring that discretionary expenditure is maximised in the affected year. This will be the accounting period which ends in the 2023/24 tax year as well as the period to 31 March 2024. So, if a business is anticipating spending significant amounts on repairs or new capital items either delaying them or bringing them forward so that they fall within the affected period will be beneficial. With capital expenditure that is acquired on Hire Purchase, the key date for tax relief is when it is available for use by the business. This is usually when it is delivered to the business premises. With significant lead times being seen across all items of agricultural machinery, it may be that decisions need to be taken in the near future to ensure that the tax allowances are available in the correct period. Change of year end Whilst the changes take effect from 2023/24, it could be beneficial to change the partnership end prior to the changes taking place, particularly for if there is expected to be lower profitability. By changing the year end early, it would not be possible to spread any additional tax over five years as the case can be under the transitional rules, so it is important to only consider this option in low profit years. Forecast While manipulating expenditure will be useful in minimising the impact of the reforms, there is still likely to be additional tax liabilities in the year of the change. It is therefore vital that robust cash flow and profit forecasts are prepared so that tax liabilities can be estimated accurately, and businesses can plan for this additional tax. At Scrutton Bland, our team can help with forecasting for these additional tax liabilities and suggest planning opportunities that will assist in lowering the amount of tax due. We can also discuss the options in terms of incorporation of the business and other alternative structures.
2022/23
2023/24
Profit
Profit
Year ended 30 June 2022
£80,000
Year ended 30 June 2023 Period from 1 July 2023 – 31 March 2024
£80,000
£60,000
Overlap profit
-£10,000
Total
£130,000
Tax & National Insurance
£24,702
Tax & National Insurance
£51,355
In this transition year, the tax liability has more than doubled, with additional tax of over £26,600. This can present huge challenges to cash flow and a significant reduction in cash available for drawings. To assist with this, individuals will be permitted to spread this additional tax over a 5 year period. However, as shown in this example, this will still mean £5,330 of additional tax being payable in each of the following five years.
The changes affect a self-employed sole trader in the same way.
AGRICULTURE AND FARMING | SCRUTTON BLAND | 1 1
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