Article of Transitional Profit 2023-24

Question:

I am looking at my client’s projected tax position for the year ending April 2024. This is the year in which the change in basis periods takes effect, and I would like to know about the treatment of the profits of the ‘transitional period’ and wonder if you could advise me?

Answer:

The transitional profits are those that cover the period from the end of the historically used accounting date to the 5April 2024. This transitional profit can be reduced by any amount of unused ‘Overlap Relief’ available from earlier years. If you are unable to find out the amount of unused Overlap Relief, it is possible in some cases to get the information from HM Revenue & Customs. Go to Gov.UK Guidance -Get your Overlap figure and follow the instructions.

Once you have calculated the ‘transitional profit’ net of any overlap relief, this amount will be spread over a 5-year period, commencing in 2023-2024, unless you wish to elect to pay it over a shorter period.

It should be noted, however, that should the business cease to trade before the end of the 5-year period or shorter period, the unassessed amount of transitional profit will be assessed in full in the final year.

Once you have determined the ‘transitional profit’ for the year, you will need to calculate the tax due on them. Please be aware that this is not as simple as just applying the marginal rate tax.

The ‘transitional profit ‘is stripped out of the net income, and the tax due on the transitional profit is calculated separately and brought back into charge as a standalone charge.

By excluding the ‘transitional profits’ in this manner, it helps reduce the impact on other areas of the tax system, such as the thresholds for the ‘High Income Child Benefit Charge’.

However, it should be noted that the above will not address other possible interactions, such as an individual’s personal allowance being tapered where the transitional rules take their income over £100,000.

Further information regarding the above rules can be found under the following references:

BIM81290-Transitionpart of the basis period exists.

BIM81310-Spreading transition profits.

If you need any assistance in this or any other matter, please get in touch.

Sean Kavanagh

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