Moving to a tax year basis and dealing with provisional figures

Further to the our previous article on basis period reform, HMRC been consulting on how to deal with Provisional Figures.

This has been a critical discussion as some self-employed individuals will find that the move to a tax year basis of reporting their profits will mean that, every year, they are being asked to report profit figures before all relevant accounting periods have concluded and/or financial statements have been prepared.

Example:

A business that prepares accounts to 28 February each year will find themselves in the following position, unless they choose to change their accounting year end.

2022/23 – The taxable profits from the year to 28 February 2023 are used as the basis of assessment for the tax year.

2023/24 – The taxable profits from the year to 28 February 2024 plus 36/365ths (1 month) of the taxable profits from the year to 28 February 2025 will be used as the basis of assessment for this tax year of transition in the reform. Adjustments will be made for overlap profits held and there may be spreading of ‘excess profits’ as set out in the earlier article.

• Note – the 2023/24 declarations of taxable profits must be made by 31 January 2025. The taxable profits from the year to 28 February 2025 will not be known by then!

2024/25 – The tax year basis of assessment will require 329/365^th (11 months) of the taxable profits from the year to 28 February 2025 and 36/365ths (1 month) of the taxable profits from the year to 28 February 2026.

• Note – the 2024/25 declarations of taxable profits must be made by 31 January 2026. The taxable profits from the year to 28 February 2026 will not be known by then!

And so on.

Current rules – provisional figures

Businesses that do not have all of the information that they need to finalise their tax return by the deadline are required to submit a return including provisional figures. Businesses should provide a provisional ‘best estimate’ of the figure needed in their return when filing, and then update the provisional figure through an amendment as soon as possible when the actual figures are available.

It can be seen that affected business owners will always be required to make two submissions to finalise their tax position for each tax year. This substantially increases the administrative burden associated with the self-assessment process.

Any additional tax must be paid within 30 days of the amendment.

New Approach

After considering the feedback provided by stakeholders, as well as the legislative complexity and delivery implications of the options available, the Government has decided to allow businesses to amend provisional figures to the normal time limits for amendments. This will effectively allow businesses and agents to amend provisional figures at the same time as the business’s following tax return.

HMRC will give effect to this easement by changing HMRC’s guidance on provisional figures to relax the condition that currently asks businesses to make amendments to provide final figures ‘without delay’.