Farms and Estates update: Basis period reform

For a number of years sole traders and partnerships have reported their taxable profits to HMRC based on the profits in the accounting period ending in the tax year. It is quite common for arable farmers to have a business year end of 30 September to tie in with the harvest year. The accounting period ending 30 September 2022 being taxable in the tax year ending 5 April 2023. This is known as the ‘basis period’.

HMRC is now changing the basis period so that, regardless of your business year end, all sole traders and partnerships must report and pay tax on the profits arising in the tax year, so from 6 April to 5 April. This will begin from 5 April 2024 and the 2023/2024 tax year will be a transitional year.

Any sole trade or partnership with a year end of 31 March or 5 April will not be affected by this change in reporting requirements.

For those who are affected, action may need to be taken by the business owners. There are some factors to consider when assessing how this change in legislation affects your rural business, such as:

  • Should you change your year end to 31 March or 5 April? There are pros and cons to changing a business year end and factors such as involvement with other trading entities may have a bearing.
  • If changing your year end is the best way forward, when is the right time to make the change? You need to understand the tax implications and whether you can meet the criteria to allow additional profits made in the transitional year to be spread over a five-year period.
  • Is your business likely to make a profit or loss in the transitional year and how to best utilise any loss?
  • How do the transitional rules work with farmers averaging?

When changing your year end it is important to consider if you have any overlap profits which would have arisen when you started the business, or possibly if you have already changed the year end.

Overlap profits will need to be identified and used to reduce the total profits in the transitional year.

Some businesses may choose to incorporate and become a limited company. There is a lot to consider when deciding if this is the right path for your business. For many rural businesses this is unlikely to be the preferred option when considering all the taxes at stake.

If you continue with a non-31 March/5 April accounting period end, the profits taxable in a tax year will need to be based on a proportion of more than one year. For example, a 30 September 2026 year end will be split, profits between 1 October 2025 and 5 April 2026 being taxed in 2025/26 and the remaining six months to 30 September 2026 taxed in 2026/27. As the self-assessment tax return filing deadline for 2025/26 is 31 January 2027, there is only four months after the year end to complete the year end accounts. Alternatively, businesses and individuals can file estimated tax returns and amend these once the accounts have been finalised, this will lead to duplication of some work and, inevitably, increased accountancy fees!

In summary, if your sole trade or partnership has a year end other than 31 March or 5 April there will be action required to adjust to the new basis period. Hazlewoods can evaluate the options and identify the right path forward for your business.

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