What are the practical implications?
It is important to be aware of the additional tax, compliance and reporting implications of the changes before the start of your next accounting period.
For businesses with higher profits in 2023/24 (after the deduction of overlap profits) due to the change in basis, there is an automatic election to spread those additional profits over a period of five years, which you can opt out of.
This ‘profit spreading’ must commence in 2023/24 and taxpayers can elect to bring in to charge the additional profit allocation at any point during the spreading period.
The transitional profit will create a ‘stand-alone tax charge’ that will not affect the level of taxpayer’s income that is used to calculate entitlements to relief on pension contributions or Child Benefit.
Compliance and reporting
You will be required to prepare and pay tax on profits for a period in which the accounts may not yet be finalised and estimates will be required. Estimates will almost certainly be inaccurate and so further reports will need to be prepared, effectively doubling the workload for finance teams.
Updating the figures will entail an amended Tax Return being submitted to HMRC. It is important to note that any late submissions will incur automatic penalties from HMRC.
If any amendments result in an increase in reportable profits, this in turn will cause an increase in tax payable. It is important to note that any late paid tax will result in late payment interest (and in extreme cases, penalties) being charged by HMRC.
Late payment interest charges is set to rise to 4.75% from 11 October 2022.