Farm businesses could face higher tax bills in 2025 as a result of changes being introduced by HMRC.
These changes – known as basis period reform – mean that from 2024 a sole trader or partner in a partnership will be taxed on the actual profits in a tax year, rather than the profits from a set of accounts ending in the tax year.
Key point of the basis period reform
HMRC would prefer all unincorporated businesses to prepare accounts to 5 April each year, in order to simplify the calculation of tax and processing of returns. Farmers operating via a limited company can continue to prepare accounts to their chosen year-end.
HMRC acknowledges that many accounting dates are chosen for practical reasons rather than for tax purposes, and will not compel businesses to prepare accounts to 5 April. HMRC will accept a 31 March accounting date as complying with the new rules.
All businesses that do not already have an accounting date between 31 March and 5 April will see their profits calculated differently from 2024.
If a business does not have an accounting date between 31 March and 5 April, it will have been taxed twice on the same profit in the past, most likely when the business commenced or a partner joined the business. This is known as overlap profit. In the transitional year to 5 April 2024, a person will be taxed on more than 12 months profit but will be able to deduct their overlap profit.
Any additional profits arising from the transitional adjustment in 2024 can be spread over 5 years.
If a business chooses to retain its current accounting date, on its tax return taxable profit will be made up of part of the profits from two accounting periods
By way of example, taking a business with a 31 December accounting date, their profit for the tax year ending 5 April 2025 will be calculated as follows:
270/365 (or 9 months) of the year ended 31 December 2024, plus
95/365 (or 3 months) of the year ended 31 December 2025.
This will give a practical issue as this tax return has to be filed with HMRC by 31 January 2026 and it is unlikely that the accounts to 31 December 2025 will be completed by this date.
Estimated figures can be used, which will need to be corrected at a later date. Having access to accurate management information, therefore, will be essential to minimise interest on any tax paid late.
You’ll need to decide whether to retain your existing accounting date and find out how much overlap profit you have, to see if you are likely to face an additional tax bill in 2025 as a result of the changes.
If you would like support and advice, please contact our agricultural accounting team.
