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Practices urged to plan for larger tax bills for 2023/24 under key tax reforms

by Beth Gault
25 January 2023

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Practices and GPs are being warned they are likely to face higher tax bills for 2023/24 as new government tax rules affecting businesses and the self-employed start to come into play.

HMRC is changing the way it calculates taxes from profits from April 2024, GP practices are being reminded by accountants, Mazars. But the impact of the move will be felt by surgeries and GPs much sooner.

 This measure will move the time period that taxable profits are calculated to align with the standard tax year (April to March), rather than businesses’ own accounting year-end, which can be whatever date they choose.

Practices and GPs who currently do not run their accounting year in line with the tax year, (with a 31 March or 5 April accounting date), will face higher taxes for the 2023/24 tax year, as this will act as a ‘transition year’.

Dawn Laird, healthcare manager at accountants Mazars explained that for 2023/24, practices and GPs who use an accounting period different to the standard tax year will be taxed on more than 12 months of profit i.e. their usual accounting period plus the number of months to 5 April 2024.

So, for example, she said, if a practice makes a profit of £150,000 for its accounting year ending 30 September 2023, and a profit of £75,000 between 1 October 2023 and 5 April 2024, then it will be taxed on the combined profits of £225,000 for that transitional year.

However, under the reforms and to help with cashflow, the extra profit taxed, which is £75,000 in this example, is able to be spread over a five-year period. The higher payment for practices and GPs will be due in January 2025.

Mazars has warned though that because the ‘five-year spread’ applies to the additional profits not the additional tax incurred in 2023/2024 it could push some GPs into a higher tax rate band, or lead to a loss of personal allowance.

There is no requirement for practices or GPs to change their year-end date, Ms Laird says. However, she adds, that HMRC will still expect the additional tax for the 2023/24 year.

If a practice decides to retain its business year end as it is that could cost the practice more money because submissions for the standard tax year would still be required, Ms Laird warned. This will mean there are two submissions to HMRC each year: an estimated returns and then a final tax return.

‘This leads to greater work for the practice and the accountants and would therefore result in higher costs’, explained Ms Laird. 

At the same time, practices that may want to change their accounting period to 31 March are being advised not to take any action until the new rules come into effect on 6 April 2024. Making the changes sooner means practices will be unlikely to be allowed to spread the additional tax liabilities, Ms Laird advised.

For now, she added, practices and GPs only need be aware that the change is coming and to plan for the extra tax bill.

‘Practices will not know what the additional tax figure is at the moment. But it’s important to think about having a plan and saving for that additional tax.’

HMRC has said that the changes it is making called ‘Basis Period reform’ aim to create ‘a simpler, fairer and more transparent set of rules for the allocation of trading income to tax years.’

Ms Laird agreed it will ‘make the whole process simpler,’. She added: ‘It also ties in with Making Tax Digital that will require quarterly updates when it comes into force.’ 

Key points to new tax rules affecting practices and GPs from April 2024:

  • Profits made by GPs’ and practices’ taxable profit will be based on the standard tax year (March to April) rather than their own accounting periods. 
  • For 2023/24, a ‘transition year’, this will mean they are likely to have higher taxable income.
  • There is no requirement on practices or GPs to change their year-end date to align with the tax year. However, not doing so may be a disadvantage.
  • If a practice or GP does not change its accounting year, it will still be expected to pay the additional tax for the transition year, 2023/24.
  • There is no gain in changing your accounting period before the new rule comes into place. Those that do this may not be able to benefit from the five-year spreading of the additional costs.
  • The change will affect pensionable pay. Accountants Mazars has said it could result in additional pension contributions. It’s not known if  ‘spreading’ of this cost will be allowed.
  • A rise in pensionable pay for 2023/24 may, in turn, result in increased pension growth that could create an annual allowance issue for GPs. There is no further information from the government on this and whether there will be a compensatory scheme to alleviate the additional tax burden.
  • Automatic relief for overlap profits created in earlier years will also be given in the 2023/24 tax year. So, partners may see a slight decrease in the extra amount they have to pay due to this overlap relief.