Another sting for those affected by basis period reform

The Chancellor announced in her Budget speech that the government is increasing the interest charge on late payment of tax by 1.5% from 6 April 2025.

Interest on late paid tax is currently set at 2.5% above base and was at 2.6% until January 2022 when it started its upward trajectory to the current level of 7.5%.

From April 2025, the rate will therefore increase to 9%.

We all agree that it is right that interest is charged on late paid tax.

Partners affected by basis period reform are likely to be including estimated figures in their tax returns for 2023/24 and future years. The tax return for 2023/24 tax year is likely to contain estimated figures in respect of one fifth of the transitional profits. Furthermore, they form the basis for the payments on account for 2024/25. If the estimate is too low then interest will be levied on late paid tax. It is therefore important that a buffer is included as the interest charge arising could quickly stack up.

The issue of estimated figures in tax returns for partners will continue for future years and will be particularly challenging for firms with accounting year ends between September and end of February as profit shares are unlikely to have been computed, let alone taxable profit shares.

It is usual for UK firms to hold tax reserves on behalf of partners and to make the relevant tax payments in January and July of each year.

Ensuring there is a sufficient buffer to minimise any potential interest charges is just another strain on cashflow for the firm.

With the increases in employers NIC, cashflow management has never been quite so important and cash as always remains king.

For example

A firm has an accounting year end of 31 December.

Tax year 2023/24

Assessable profits for partners will be based on: 

• taxable profits of the year ended 31 December 2023, plus 
• 1/5 of transitional profits, where the transitional profits are 
  • 3/12 of taxable profits of the year ended 31 December 2024 
  • less overlap profits brought forward.

The tax liability for individual partners will be payable in three instalments. The first and second instalments for continuing partners will have already been paid in January and July 2024 based on the tax liability for the tax year 2022/23.

The balancing payment, however, will be due by 31 January 2025 and if the tax liability has been underestimated then the tax paid will be subject to late paid interest at a rate of 7.5% until 6 April 2025 when it will increase to 9%.

Tax year 2024/25

Assessable profits for partners will be based on: 

• 9/12 of taxable profits of the year ended 31 December 2024 
• 3/12 of taxable profits of the year ended 31 December 2025, plus 
• 1/5 of transitional profits.

The tax liability for individual partners will be payable in three instalments. The first and second instalments will be based on the finalised tax liability for 2023/24 and payable in equal instalments on the 31 January and 31 July 2025, whereas the balancing payment will be due 31 January 2026.

As the 2023/24 tax liability will initially be based on estimated figures, if these prove to be underestimated further tax will be due both in respect of the balancing payment for 2023/24 and the first payment on account for 2024/25, due 31 January 2025 and depending on timing, the second payment on account for 2024/25 due 31 July 2025.

The additional tax due will be subject to late payment interest at 7.5% until 5 April 2025, rising to 9% thereafter. It will not take long for the interest charges to rack up.

Therefore, great care needs to be taken when estimating the relevant taxable profit shares as interest charges could quickly mount up.

If you would like to discuss this further, please get in touch with Nicky Owen or your usual Crowe contact.