Original content provided by BDO United Kingdom
Basis period reform – what should my partnership do next?
On 2 December 2022, HMRC released the outcome of its review into administrative easements to relieve the pressures on partnerships of their partners having to file tax returns with provisional figures due to the basis period reforms. Of the options considered, HMRC has confirmed that it will only be introducing the very limited easement of allowing businesses to amend provisional figures at the same time as the following year’s tax returns. In reality, this is likely to provide no practical easement at all, as most businesses are only in a position to amend provisional figures at that time anyway.
Going forward, we now know that most businesses that are unable to change their accounting date to 31 March will have to deal with apportioning profits from two accounting periods to arrive at profits on the tax year basis, and then to refile tax returns on bulk the following year to amend provisional figures.
While this outcome is disappointing, it now provides the opportunity for partnerships to finalise their plans for basis period reform. There are many areas to work through, and we recommend that partnerships now give priority to determining how they will respond to these seven key issues:
1. Cash flow modelling
Many partnerships have prepared high-level estimates of the accelerated tax liabilities. We recommend these calculations are now refined to cover individual circumstances which could significantly alter the cash flow position. For example, which partners will elect not to spread their transitional period profits? Are there any partners with shortfalls in tax reserves as (say) it will not be possible for overlap profits to be relieved at the highest rates of tax?
Regular dialogue with finance colleagues to understand the partnership’s ability to fund the liabilities where relevant will clearly be important.
Partnerships might also benefit from building models which stress test any assumptions. For example, given the current political and economic climate, many are concerned that tax rates will increase, and spreading of transitional profits will become more expensive. Thankfully, an election to accelerate remaining spread profits in any tax year can be made up until one year after the normal filing date for that year so, in practice, any tax rate changes will be known before a decision needs to be made. If, in the event that, say, two years into the five-year spreading period, it proved prudent for partners to accelerate the remaining spread profits, what would be the impact on the partnership’s financing? Is there sufficient headroom with financing facilities to deal with this?
2. To change or not to change?
We recommend that firms finalise their decisions regarding whether they will change the partnership’s year end to 31 March, and ensure that relevant project teams are ready to respond to the related issues.
3. Partner communication plan
Tax and finance teams will need to determine what communications will be needed and expected by your partner group. A partnership might prepare tax returns for partners in house or use a recommended agent for the partner filings, and might have already been engaging with partners on the changes.
However, some partnerships may leave partners to arrange their own tax affairs, although they would provide partnership figures and guidance on tax payments. In such cases, the partnership will need to decide if it will prepare the apportionments and estimates for partners. Partners who fund their own tax liabilities will need to understand the impact of accelerated tax payments due to basis period reform and, potentially, will need help funding the liabilities. The business might consider providing FAQs, briefing packs and partner seminars to reduce queries from partners and provide more certainty to them.
4. Agree the process for providing estimates to partners
A reasonable strategy might be to aim to provide profit estimates to partners earlier in the cycle, which will be subsequently amended following finalisation of the appropriate tax computations -likely post deadline. Early information, followed by later certainty, can take out some of the stress associated with time pressures.
The estimation process will be complex for international firms when it comes to the allocation of jurisdictional profits and associated double tax relief, particularly where foreign profits are likely to be reported on a December year end. This could be difficult, and particularly challenging for these firms trying to complete the tasks in readiness for the statutory filing deadline.
However, it will be important to take the exercise seriously, as the downside of getting the estimation wrong is likely to be interest charges and negative partner communication. HMRC has confirmed that it is not expecting to provide additional guidance with regard to how partnerships should prepare estimated figures requiring that provisional figures should be made on a “best estimate” basis in line with current guidance.
The amendment process for final figures for partner returns in bulk will be time-consuming. Where partners are completing their own returns, they will need to be made aware of the amendment process and the actions required.
5. Continue to engage with HMRC
For those large partnerships with designated HMRC contacts, we understand that HMRC is expecting partnerships to be in dialogue on some of the issues. We understand that HMRC is working on internal guidance for compliance colleagues, to ensure a consistent approach. We also understand that the review raised many areas on matters such as the partnership tax return itself, which HMRC will look to consider over a longer period of time, in conjunction with plans on other areas such as Making Tax Digital.
For those firms without dedicated HMRC contacts, BDO are in regular dialogue with HMRC on behalf of our clients and the professional services sector generally, and would welcome the opportunity to include your feedback in our discussions.
6. Formulate a plan for approaching compliance for the transitional year
The transitional year began on 6 April 2023, with many businesses already within their final accounting period under the old basis. Although partnerships will have until 31 January 2025 to file final tax returns for the transitional tax year, issues such as establishing and evidencing overlap profits (or what to do if they can’t) may well prove time consuming. To avoid what could be a doubling of workload in summer 2024, we would recommend that partnerships prepare a road map from 2023 until January 2025 to map out where work will need to be accelerated. This might require partnerships to hire extra resource, consider technology options or to change their overall approach to partner tax compliance - all of which involve a lead time, hence an early plan will be important.
7. Consider impact on international operations
With the legislation and HMRC’s review now settled, partnerships with international operations and partners should start to clarify how basis period reform will affect areas such as double tax relief where the international implications of transitional profits and spreading, etc. may not be clear. Non-UK resident partners will also need to understand the impact of accelerated UK tax payments on their local tax credit position. BDO are seeking to clarify technical areas with HMRC, and would welcome discussions with partnerships about how basis period reform will affect the international aspects of your group.
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