Background Most public sector pension schemes were reformed back in 2015 and the NHS introduced a new version of its pension scheme from 1 April 2015…
What is basis period change?
Currently, self-employed partners in GP practices pay income tax on their share of profits for the accounting period ending in the tax year of assessment – this is known as the current year basis. So, if you have a 30 April year-end, for the tax year 2022/23 (ending 5 April 2023), a partner will be assessed on profits from the financial year ended 30 April 2022. If your practice reports to 31 March (or 5 April) each year, you are not affected.
Moving forward all partners will be taxed on profits that arise in the period 6 April to 5 April the following year – this is known as the tax year basis. The practice year-end will no longer be relevant for the taxation period.
The change to a tax year basis will happen from 6 April 2024, the 2024/25 tax year.
The 2023/24 tax year, which started on 6 April 2023 is a transitional year and will be subject to special rules.
How will my profits during the transitional year (2023/24) be calculated?
For each partner, all taxable profits from the end of the accounting period that formed the basis for the 2022/23 assessment (say 30 April 2022), up to 5 April 2024 (or 31 March which is also acceptable), will be assessed in 2023/24.
In practical terms, this means that a 12-month set of accounts to your usual accounting date will be prepared, then either a) a short-period set of accounts from the start of the new financial year to 31 March (or 5 April), or b) a proportion of your continuing 12-month set of accounts.
In a worst-case scenario, if a partnership has a 30 April year-end this will mean that 23 months’ profits will potentially be assessed in one go (subject to overlap relief brought forward and spreading – see more below).
Should we change our practice year-end?
An important decision is whether to change your practice year-end. With the NHS year-end aligned to 31 March and the difficulties that a non-March year-end brings in terms of tax and pension liabilities, a move may seem the obvious choice.
That said, practice workload and availability of data need to be considered before deciding.
For practices that do change, a set of accounts will be prepared up to 31 March 2024. For those that don’t, accounts can continue to be prepared as normal and it will be for the practice accountants to apportion profits from those accounts into the relevant tax year.
For a practice continuing with a year-end date falling later in the year, the date of accounts finalisation needs to be considered. Accounts would need to be finalised in advance of the following 31 January, to apportion profits from two accounts years, for purposes of the relevant tax returns.
What is overlap profit?
Overlap profit would have been created when a partner joined the practice (or when the overlap provisions were brought in). With the previous rules, a partner joining a practice with a non-March year-end, would have been taxed twice on a certain period of profits.
If a partner joined a practice with a September year-end on say 1 October, they would have been required to complete their first tax return with figures for 1 October to the following 5 April. For the second year, a full year of profits would be taken from 1 October to 30 September – as you can see, the period 1 October to 5 April has been taxed twice. The value of this would be carried forward as overlap profit.
Partners retiring in 2023/24
If a partner retires in 2023/24, the old rules (current year basis) will continue to apply until they leave the partnership. They will be able to deduct their brought forward overlap profits.
How does spreading work?
Transition profits are the profits arising from the day after the normal practice year-end date in 23/24 and the following 5 April, less any overlap profits brought forward. For a 30 April year-end that means from 1 May 2023 – 5 April 2024, less relevant overlap profits.
Where there are transition profits for that tax year, the profits will automatically be spread and taxed on the partner (equally) over five years. Essentially, an amount equal to one fifth of the transition profits will be added to the partners’ tax computation over the following five tax years.
If a partner leaves the partnership at any point before the start of the fifth year, the balance of the transition profits is treated as arising in the tax year of them leaving. This happens regardless of the reason for leaving the partnership.
As you can see, it’s likely that partners may see this as additional tax liabilities due to the change. It’s important to note that this is not an additional tax liability, rather an accelerated one.
Additional tax liabilities will arise where overlap profits are lower than current profits. This is likely to be due to the time that’s lapsed since those overlap profits were created. Profit today, is likely higher than profits ten or more years ago.
Electing to opt out of spreading
Spreading is automatic, but partners can elect not to spread transition profits.
This may be sensible where a partner’s total income is on/around £100,000. Income between this level and £125,140 is effectively taxed at 62%.
Therefore, if transition profits were £50,000, £10,000 a year would be added to the next 5 years’ total profits. This would mean all transition profits would be taxed at 62%.
Opting out of spreading would mean an additional £50,000 of profit is taxed within the 2023/24 tax year, of which, almost £25,000 would be taxed at 47% and not 62%. This would equate to a tax saving of just short of £4,000. Of course, cash would be required to settle the additional tax liability in one go.
Planning and managing
It’s important to understand how the changes will impact the practice and its partners, so that plans can be made. The higher tax liabilities will start to be paid from January 2025 onwards. If not already aware, we can provide calculations to consider the additional tax liabilities and the impact of spreading on partners.
If your year-end is changing to 31 March 2024, please ensure that you consider the implications of this – stock takes will need to be arranged, the accounting records brought up to date and an agreement of timescales for the practice accounts meeting would be advisable.
Should you need help or support with this, please contact your usual member of the medical team.