With the 2026 deadline fast approaching, businesses have been pre-occupied with the complexities of Making Tax Digital (MTD). But this is not the only big change they should be focused on when it comes to tax reporting. A different set of rules altogether could see accountants’ clients – and even some practices – hit by an extra-large tax bill.
Basis period reform (BPR) seeks to ‘remove complication’ by aligning sole trader and limited liability partnership (LLP) tax filings with that of the tax year itself. But there’s not much time to prepare for it. From April, businesses will be required to report taxable profits for the period up to 5 April, regardless of their accounting year-end.
There has been the concern that MTD might be a step towards HMRC collecting tax earlier, and BPR could be a cash nightmare for some small businesses. It could result in incredibly stressful situations for those affected by the changes, and some may suffer financial catastrophe if arrangements are not made to accommodate them.
Those paying the bill won’t necessarily see the work as adding any value
That’s because with 2023/24 being a transition year, businesses with a year-end that fails to match the tax year-end will have to ‘catch up’. In other words, those with a 30 April year-end could be taxed on 23 months of profit.
What’s more, BPR’s biggest hit could be on accountants themselves. With the extra work needed to bring clients in line on a rather technical issue, those paying the bill won’t necessarily see the work as adding any value. That then leads to difficulties when it comes to charging fees.
Communication challenges
While this change isn’t entirely new, it has progressed quietly since its announcement in 2021, with little public debate or awareness. It aligns with the government’s broader efforts to increase tax revenue, and may be a precursor to standardising year-ends and potentially introducing ‘payments on account’, possibly on a quarterly basis.
Indeed, many practitioners have already begun considering changing accounting periods for clients impacted by BPR to assist them in managing their upcoming tax bills. Many will also be familiar with ‘overlap relief’, which allows the spreading of the additional tax burden over five years. However, despite this option, the reform could still significantly impact cash positions.
Some industries will be more affected than others. Hospitality and farming businesses usually have specific accounting dates that match up to the end of busy periods – and moving their date away from those periods will skew their numbers.
Practitioners may have failed to mitigate against difficulties with partner payouts
Again, some professional services organisations could find difficulties in their own books, with the possibility of equity holders leaving but receiving payouts across the next few years. This will need to be accounted for if cashflow arrangements have been taken out to mitigate against the initial one-off tax bill caused by BPR.
Raising awareness
Some practices may have failed to do enough to warn their clients; practitioners operating within LLPs themselves may have also failed to mitigate against potential difficulties that these accelerated tax payments (and/or shifting their accounting period) may have on any partner payouts.
This may be because many practices will have generalists who won’t delve into the detail of the legislation and will therefore be unaware or unsure of its magnitude.
The lack of publicity around this change may stem from its technical nature; many tax professionals will be aware of it but might not have paid it the same level of attention as major government projects, such as MTD. This is regrettable given the impact it’s going to have on many tax bills, and one must wonder why, in the absence of any significant communication, the government has failed to put precautionary measures in place.
Significant change
To put it bluntly, there hasn’t been such a significant change in tax calculation methods in recent memory. While there have been changes, such as the introduction of Self Assessment and independent taxation of couples, none has had as substantial an impact on taxpayers’ awareness.
The main challenge lies in the technical work required to align clients with the new regulations
Implementing this change will require practitioners and their clients to think about their individual circumstances, and any potential impact on investment decisions, to determine what period they are recorded in and the associated tax benefits.
There will inevitably be some businesses that are disproportionately affected, but most will have options to mitigate the impact of the reform, such as spreading costs over a longer period. However, the main challenge for accountants lies in the technical work required to align clients with the new regulations, which – as I mentioned earlier but is important to reiterate – may not directly add value to clients and could make fee charging a challenge.
Act now
This reform will entail several challenges:
- There may be a need for revised reporting practices.
- Providing intricate tax advice to navigate various scenarios will be necessary to limit undue tax increases.
- There will be additional reporting costs, potentially requiring extra accounts advice, and more complex tax calculations as the changes take effect.
- Cash management will be crucial for businesses to ensure continuity amidst potential disruptions to their usual operations.
Ultimately, the main challenge will be to navigate the complexities of BPR and communicate these to clients, while also redefining their roles in a rapidly evolving tax landscape.
