Care sector update: Changes ahead reforming income tax basis periods
Alongside the introduction of Making Tax Digital (MTD) for income tax, with effect from 6 April 2024, profits will be taxed in line with the tax year instead of the current accounting period of the business.
There will be a transitional period for calculating the profits in the year 2023-24, with a particular area of challenge around the clarification and utilisation of the overlap tax relief (a relief where businesses with an accounting period other than 31 March to 5 April may have been effectively taxed twice at the start of their business life).
Included in the transition part of the MTD process for 2023-24 will be looking at the utilisation of transition part profits and the interaction of overlap relief, with additional complications for utilising losses.
Who will be impacted by this change in the income tax system? All businesses without a 31 March to 5 April year end whose business structure is non corporate, thus if you are trading as a sole trader or a partnership as opposed to trading as a limited company.
There will be challenges with the new basis of tax and tax advisors will be making recommendations.
Challenges currently perceived include:
Estimates for profits of the second accounting period in the tax year
This period may still be in progress by the time the tax return is required to be filed with HMRC
HMRC has suggested various solutions to the above, but the next few years will add a layer of complexity for the processing of tax compliance for the unincorporated business.
With the acceleration of the digital revolution across the care sector, the use of automation within the bookkeeping process of accounting, with access to real time management information, is increasing in importance as the onboarding of MTD approaches.
Care businesses with up to date, real time accounting information, will be able to assess the effects of MTD in advance, and determine if moving to MTD will create a cash flow shortfall that may require funding in the short term.
