Change of tax basis periods
This applies to sole practitioners and partnerships (including LLPs) with an accounting date that does not fall from between 31 March to 5 April.
Previously, partners in these firms have paid tax on their profits further in arrears than those businesses whose accounting dates are coterminous with the end of the tax year, but that changes this year and for affected firms, this is going to result in a tax ‘catch-up charge’ on 31 January 2025.
For the tax year ending 5 April 2024, all sole practitioners or partnerships with a non-31 March to 5 April accounting year-end are going to need to apportion practice profits of a particular accounting period between those arising in one tax year and those arising in the next. For example, a firm with a 30 April year-end will have 11 months of their accounting year in one tax year (1 May to 5 April) and one month in the next (6 April to 30 April).
The apportionment process will add an extra layer of administration into the whole annual accounting and tax computation process, and many law firms are considering a change of accounting date to 31 March to ease this burden. However, care needs to be taken in order to ensure that changes in accounting date do not result in unfavourable operational or tax related consequences.
LLP members – a reminder to review your self-employed status
As is normal for this time of year, LLPs need to review each member’s position to ensure they can continue to be taxed as a self-employed individual.
By way of a reminder, three conditions need to be considered separately, and just one needs to be ‘failed’ for a person to be classed as self-employed. In brief, they are:
- At least 80% of remuneration is fixed or not linked to firm wide performance
- The member does not have significant influence
The member’s capital contribution is less than 25% of their remuneration.
Reality can be a little more nuanced than this of course, and we frequently advise firms on all of the issues noted here, so please do get in touch if you have any questions.
