HMRC is changing the way it calculates taxes from profits from 6 April 2024/25. However, some GP practices and GPs may feel the effect of this in the next financial year starting 6 April 2023 and be liable for higher tax bills. GP accountant Dawn Laird explains what the reforms are and what practices and GPs needs to consider
HMRC is changing the time period that taxable profits are calculated so it aligns with the standard tax year (April to March), rather than businesses’ own accounting year-end, which can be whatever date they choose.
This will take effect from 6 April 2024. The reform aims to create a simpler, fairer and more transparent set of rules for the allocation of trading income to tax years, the government has said.
The 2023/24 tax year (starting 6 April 2023) will act as a ‘transition year’ for moving to this new way of working.
Who will be affected and how?
The new rules affect all unincorporated business and individuals who do not currently prepare their accounts to 31 March or 5 April (for simplicity, HMRC treats both of these dates as if they were 5 April i.e. tax year-end). So, for example, the change will affect a practice accounts whose year-end is 30 June 2023.
Affected practices and GPs will face higher taxes for the 2023/24 tax year, the transition year. This is because during this period they will be taxed on more than 12 months of profit i.e. their usual 12 months to their accounting date ending in the tax year 23/24, plus the number of months to 5 April 2024. For example, for those with a 30 June 2023 accounting year end, tax will apply on profits from 1 July 2022 to 5 April 2024 (21 months). This will create ‘transition profits’ (explained further below).
What are the options open to practices and GPs?
Surgeries and GPs are not obliged to permanently amend their accounting periods to 31 March and can retain their current arrangements. However, there are some disadvantages to not making the changeover. Not being aligned to the tax year-end will mean provisional profit figures have to be submitted each year to HMRC, with a further submission at a later date, leading to more work and greater costs.
Moving the accounts year end to align with the tax year offers simplicity for all. For example, some GP’s may find a non-March year end challenging in terms of personal expenses information versus tax year-end information.
It would be sensible for GP practices to move to accounts year end permanently.
What will happen with overlap relief?
Overlap profits can arise in the first few years of trading where the business does not have a March year end in line with the tax year. For example, here is how it would work for a GP partner who joined a partnership on 1 September 2020, which draws up their annual accounts to 31 December:
2020/21 – GP partner taxed on profits from 1 September 2020 to 5 April 2021
2021/22 – Taxed on first 12 months of trade i.e. 1 September 2020 to 31 August 2021
So, the profits from 1 September 2020 to 5 April 2021 have been ‘taxed twice’. The level of this ‘overlap’ will be different for every partner and is dependent on when they joined. Bear in mind that overlap profits could be dated from many years ago for some GPs and could be quite a small amount in comparison with the level of profits being earned today due to inflation over time.
This overlap profit would normally be ‘relieved’ when the GP leaves/retires from the partnership. However, now overlap profits must be offset against the profits of the 2023/24 tax year. There is no facility to defer this overlap relief. It’s not yet clear whether overlap will be entirely scrapped after this.
What are the ‘transitional profits’ and how are they taxed?
This is the portion of additional profits calculated from the end of the practice’s (or GP’s) usual 12 month accounting period up to 31 March 2024, less overlap relief where relevant. These profits can be ‘spread’ over the next five years from January 2025 and taxed at the tax rate applicable in that year.
It is understood the transitional profits will be treated as a separate one-off taxable income after the assessment of income to determine entitlement to the tax-free personal allowance. This means, personal allowance is not lost in cases where the person is usually entitled.
Do I have to spread the profits over the five years?
No, there may be circumstances where some clients have the funds to pay the additional tax and do not wish to ‘spread’. With the uncertain financial world we find ourselves in, tax rates could increase over the next five years, so some may reduce this burden by settling this in year one.
When should my practice be prepared for this change?
It is imperative to keep your practice (or individual) financial records up to date. This information will be required sooner than is usually the case by your accountant to prepare the relevant period of Accounts up to 31 March 2024.
Here is an example timeline for accounts with a June year-end.
Accounts for the 12 months to 30 June 2023: Records to accountant from July 2023
Accounts for the 9-month period to 31 March 2024: Records to accountant from April 2024
Tax Return information for 2023/24: Pass to accountant as soon after 5 April 2024
2023/23 Tax Return and tax due: January 2025
It is extremely important to stick by the timeline set by your accountant. This is because essentially all practices will require accounts to 31 March 2024, and their ability to spread their workload throughout the year will be much more limited.
How do these rules affect retiring partners?
Retiring partners would lose the ‘spreading’ facility and all remaining profits would become taxable in the year of retirement under the normal rules.
Our practice has who are retiring and the practice pay the tax – what should we do?
Speak to your accountant and ensure balances remain in the practice to cover the tax. Your accountant should be looking at the capital accounts of the retiring partners anyway and therefore consider this.
How will this affect pensions payments?
A GP’s pensionable earnings are mainly the earnings figure from their tax return adjusted for various factors. Therefore, a rise in taxable pay would be a rise in pensionable pay.
Currently the rules for the calculation of pensionable earnings for GP partners and therefore pension costs follow the tax treatment. It remains unclear if the pension guidance will be amended to mirror this change in tax legislation and if the pension costs on ‘additional profits’ will also be ‘spread’ as it will be for tax.
How will this affect GPs’ annual allowance position?
A rise in pensionable pay may in turn result in increased pension growth, which could then lead to an annual allowance tax charge. There has not been any information released as to whether there could be a compensatory scheme to alleviate this additional tax burden.
Will the change affect my tax threshold?
The recent change in tax brackets for the additional rate of 45% (Scotland 47%) from £150,000 to £125,140 will have an impact generally. But we could see more clients affected because of the transitional profits created in 23/24.
What can I do now in advance of this change?
If you are concerned speak to your accountant about providing you with tax estimates.
How does this reform fit in with Making Tax Digital?
One of the reasons HMRC is making this change is Making Tax Digital, which will be enforced from 6 April 2026 and requires quarterly submissions of tax records. Making Tax Digital is a key part of the Governments Tax Administration strategy. Your practice bookkeeping system should be set up now to ensure a slick system before this comes into force. Alternatively, you could consider outsourcing this.
Dawn Laird is Healthcare Manager at Accountants Mazars LLP