US Insights

What are the current rules?

Businesses can currently account for profits or losses using an accounting year-end that suits them (known as the basis period), as long as 12 months of activity are reported to HMRC. For example, if a business’ income is weighted towards the end of the calendar year, they may have an accounting period from 1 January to 31 December, with taxes payable by 31 January the following year (more than one year after the end of their accounting period).

What’s new?

Under the new rules, businesses must report 12-month accounts using a ‘tax year basis’ (i.e., a 5 April end date), regardless of when their accounting year ends. If you do this already, your tax affairs will remain the same and no action is required. However, if you currently have a different year end, how you calculate profits and report your income to HMRC will need to change.

Moving to a 5 April year end

To keep things simple, many of those impacted by this change are expected to move to a 5 April year end from 6 April 2024 onwards. If this is your plan, you should also be aware of current tax legislation which states the two conditions needed for a change in accounting date:

1.  In the five tax years immediately before the tax year in which the change of accounting date occurs, there has been no change of accounting date which was valid for tax purposes.
2.  The reason for changing the accounting date is for commercial reasons.

The ‘tax year basis’ for calendar year businesses (e.g. those with US connections)

Considering businesses currently choose a year end to reflect the nature of their business or interactions with foreign jurisdictions, many may not (or cannot) change their accounting period to end on 5 April.

For example, if you are a partner in a US partnership, you may currently report income and losses from 1 January to 31 December each year to match the US tax treatment. Going forward, these businesses will need to continue calculating their calendar year profits, but deduct the first three months, and also then estimate January to March profits for the following year (resulting in 12 months of profits; the tax year basis).

You therefore need to think about how you will estimate those January to March profits, considering this position will need to be disclosed on your UK tax return, even though all the relevant information may not be available.

On this point, it is important to note that self-employed individuals (e.g. sole traders or partners in a partnership) may need to amend their Self-Assessment tax return each year once their business accounts are signed off and final numbers are known, leading to additional administration and (potentially) financial costs.

2023/24: The transitional year – claiming prior overlap profits

The concept of ‘overlap profits/losses’ will no longer exist from 6 April 2024.

2023/24 therefore provides a one- off, ‘use it or lose it’ opportunity to release overlap profits/losses (known as ‘overlap relief’).

For example, those with a 31 December year end will need to calculate their 23/24 profits as follows:

1.  Include a full calendar year of profits (1 January to 31 December 2023)
2.  Add 1 January to 31 March/5 April 2024 estimated profits.*
3. Deduct previously reported overlap profits included on your historic tax return (i.e. January to March profits that were previously taxed when you started your business/joined a partnership).*

*Item 2 and 3 combined will be known as the transition profit. Taxpayers will then need to decide if they wish to spread the tax owed on the transition profits over a (maximum) five year period, or alternatively pay 100% of the tax when filing their 2023/24 tax return (due 31 January 2025).

Should the overlap relief generate a loss, the business is able to carry it back up to three years (known as terminal loss relief).

How do I find my overlap profits?

You will need to know your overlap profits amount in order to claim relief (and it must have been disclosed to HMRC prior to 2023/24). If you cannot find this amount on your return, you can use HMRC’s online tool to find this. Alternatively, you may need to go through historic filings to find your overlap amounts.

What will be the impact of this reform on tax planning?

Given that UK taxes may be calculated using estimated profits (with an amended return required once the final figures have been confirmed), you may need to change your tax planning strategies. For example, for those who do not move to a UK tax year basis, discussions regarding the timing of UK tax payments for foreign tax credit planning purposes will be key.

How can we help you?

If you would like to discuss how the above may affect you and your tax affairs, please get in touch with your usual Blick Rothenberg contact, or one of the team using the below form.