From the start of the last tax year, all self-employed and Limited Liability Partnership (LLP) businesses will be taxed based on profits up to and including either March 31 or April 5, 2024, even if their business has traditionally had a different accounting year-end. As a result, some high-earning dentists will face bigger than usual tax bills.
Reform to the system – Basis Period Reform - has been initiated in order that all non-incorporated businesses pay tax on profits in the tax year in which they arose, ie to 31 March or 5 April, rather than at the end of their existing accounting period. By bringing forward the date when profits are taxed, the self-employed and LLPs with year ends other than March 31 and April 5 will pay more tax over several years until the transition to the new basis period is fully achieved. It will be burdensome to those affected (see case study below), who must be well supported by a specialist dental accountant to navigate the transition.
By accelerating the payment of tax liabilities, dentists whose accounting periods culminate on, say, April 30, September 30, or December 31 will pay tax sooner than usual.
Linda Giles, a chartered accountant and a founder of Ross Brooke Dental said, “Over the past year, we have been working with clients with differing accounting periods to help them prepare for the higher bills they will face in the current and successive years. Our job has been made harder by the lack of publicity about Basis Period Reform and a lack of understanding about who is impacted.”
To give an example, she said, if your accounts have always been prepared to 30 April, then the profits for the year ending 30 April 2023 would be taxed in the 2023/24 tax year. Now, with basis period reform, the business will need to add another 11 months’ worth of profit to March 31, 2024, so almost two years of income are being taxed in one year.
Thankfully, she said, there are two mitigating factors:
- Overlap profits: these historic profits taxed twice in the earlier years of a business can be deducted from transitional profits
- Liability spreading: the net transitional profit figure can be spread over a maximum of five years starting with the 2023/24 tax year
She added, “Higher profits now mean higher tax bills. There may be planning opportunities such as capital expenditure or personal pension contributions to mitigate the higher liability but obviously, unless taxpayers have put by sums of money on the basis of current earnings in readiness for their tax bill, the main issue is cash flow.”
“We should stress that this is not additional tax – the catch-up tax would always have been payable on cessation of the unincorporated business. Of course, typically, this would be when the business was sold, hence cash would then be available.”
Case study of an RBD client
Doctor X is a successful dentist (regularly incurring the 45 percent tax rate) with a year-end of September 30. She must pay tax as usual on the year between September 2022 and 2023, but due to the Basis Period Reform, she must pay tax on an additional six months' profit to align with the new date of March 31, 2024. After mitigation (as above), this results in additional taxable profits of £20,000 for 2023/24 and four subsequent years.
Ross Brooke Dental advised her to start immediately putting by an additional £750 monthly to meet the higher than expected tax bill. For an additional rate taxpayer, the change will cost in excess of £9,000 extra tax for each of the five years.