The 2024-25 tax year marks the first full year where HMRC’s basis period reform applies. First announced in 2021, partnerships, including LLPs, may now want to change their reporting financial year end.
Under the now-old arrangements, partnerships calculated their taxable profits using their accounting period year end, often reflecting the date the business was started.
But that has now changed, with all self-employed businesses – and that means partnerships, LLPs and sole traders – having to calculate the tax payable based on the tax year end, called the ‘basis period’. That can mean partnerships have a different accounting and tax year end.
If financial and tax year ends are not aligned partnerships may find they need to report profits in both the accounting period plus the extra period that takes them to the tax year end, meaning they may face a larger tax bill.
Impact on partnerships
Individual partners in partnerships will also need to apportion profits to reflect the basis period in their income tax returns. Where partnerships are unable to finalise their numbers, partners may need to file income tax returns on a provisional basis.
Basis period reform will likely affect individual partners in different ways depending on their personal circumstances. If not already considered, partnerships should look to financial modelling to help those partners better understand and predict the tax implications.
Accelerated tax payments that might arise following the basis period reform may also impact a partnership’s working capital, meaning close attention to and management of cash flow will be vital as the tax payment date approaches.
Changing partnership year end
Partnerships may as a result of HMRC’s basis period reform wish to change their financial year end to coincide with the tax year end, making accounting, reporting and partner tax returns a little easier.
LLPs can choose to shorten their year end as often as it wishes and extend their year end to a maximum of 18 months once every five years.
The process is straightforward. Once a new financial year end is agreed, Companies House will need to be notified before the filing deadline in the current financial year. HMRC may also need to be notified, depending on how the business files its tax return.
Whilst not essential, partnerships may also wish to align VAT quarters with the new financial year end, and so to holiday entitlements, promotions and bonuses.
