In conjunction with the introduction of Making Tax Digital (MTD) for income tax, HMRC is now looking to tax profits in line with the tax year, rather than the current approach of taxing profits based on the accounting period of the business.
This change will impact farming individuals and partners that do not have a 31 March or 5 April accounting year end date, therefore, catching businesses with a September year end to tie in with the harvest year.
The new rules are due to come in from April 2024 which is the same time as MTD for income tax. A transitional period will apply in the 2023/24 tax year.
An example of how the taxable profit will be calculated for an existing business, drawing its accounts up to 30 September, is as follows:
- Profit share for the period from 1 October 2022 to 30 September 2023 (as currently); plus
- Profit share for the period from 1 October 2023 to 5 April 2024; less
- Overlap relief brought forward
In the 2024/25 and subsequent tax years, the individual will be taxed on part of the profit from two accounting years:
- 6 April 2024 to 30 September 2024 (circa six months of the accounting period to September 2024); plus
- 1 October 2025 – 5 April 2025 (circa six months of the accounting period to 30 September 2025)
This will clearly lead to an acceleration of tax liabilities and, as such, it is anticipated that any additional tax liability arising as a result of the transitional rules in 2023/24 (e.g. profit for the accelerated period to 5 April 2024 less any overlap profit) can be spread over five tax years, rather than all being taxed up front.
Although it makes good sense to tax individuals on earnings arising in the tax year, it is likely to lead to an accelerated tax liability and potentially a higher marginal rate of tax which could lead to cash flow issues.
The latest draft legislation includes amendments to treat the transitional profit as a one-off taxable item, such that it is not included in the net income calculation for determining an individual’s entitlement to annual personal and pension allowances, as well as other means tested benefits such as the high-income child benefit charge. The draft also confirms that any transitional profits will be ignored for farmers averaging calculations. However, even with this welcome provision, some farmers and landowners could still find themselves tipped into a higher tax bracket because of the accelerated profits.
Where a loss is created or increased when relieving overlap profits, the latest announcement allows for this loss to be carried back up to three years against trading profits rather than one. If more beneficial, the taxpayer can still choose, instead, to offset against total income of the current or preceding year.
The tax return filing deadline for the 2023/24 tax return will be 31 January 2025. This would give just four months for the accounts for the year ending 30 September 2024 to be finalised, to allow an accurate allocation of profits for the period to 5 April 2024.
In many cases, it will not be possible to finalise accounts within the four-month period; therefore, in the first instance, estimates can be used which will need to be corrected when the actual figures are known. The options currently being considered to address this issue include:
- Allowing a provisional figure to be amended at the same time as filing the following year’s tax return;
- Extending the filing deadline for farmers and landowners e.g., as they are more complex partnerships with seasonal trades;
- Amending any differences between provisional and actual figures in the following year's tax return; and
- Retaining the current rules such that any estimated figures would need to be amended once actuals are known.
To simplify the tax treatment, you might consider changing your accounting date to 31 March or 5 April. Before doing so, you should discuss the timing of any change with your tax adviser, as it could result in an accelerating taxable profits, without the option to spread this over five years.