Advice: Cash issue
By Corinne Staves
At the moment, people taxed as partners (including members of LLPs) calculate and pay their tax in the UK by reference to the business’s financial year. This will change so that tax is calculated and paid by reference to the UK tax year (6 April to 5 April).
This won’t affect the overall amount of tax payable, but it will accelerate timing of tax payments. It’s a cash issue, not a tax issue. The trouble is: a lot of things are cash issues at the moment.
This means that partners and investors are likely to face greater liquidity challenges, and may look to the fund for different approaches to support their increased cashflow needs.
This will be particularly acute in the transitional year (tax year 2023/24). For the transitional year, affected taxpayers will pay tax in respect of 12 months on the usual financial year basis, plus the months between the financial year-end and the tax year-end. For a 31 December year-end, this means paying tax on 12 months and four months (a 16-month tax bill payable in one year). The worst affected will be businesses with a 30 April year-end, as those partners will have to pay tax on 23 months of profit in one year. Firms with a 31 March or 5 April financial year end will be unaffected.
UK tax compliance will be more complex as there will be much greater reliance on estimated figures (and then later, updated tax returns), and audited figures will be wanted much quicker (at a time when the audit profession is reporting that this is not viable). External spend on advisers is likely to increase. This will all be a headache for CFOs and COOs.
Some businesses are considering changing their financial year-end, but scratch beneath the surface and most businesses have concluded this is a non-runner. The changes needed to accounting systems would be very complex and time-consuming. It could also impact on behaviours: how do you award performance-bonus profits fairly if one year is a month shorter than other years?
In short, the easiest answer is to find more cash.
HMRC will automatically allow the transitional year’s tax to be paid over five years (in the 31 December example, the extra four months is paid over five years). Partners’ overlap relief (if any) will also be set against the tax. These measures will take some of the sting out for most people, but beware because instalments only apply to continuing partners; an exit accelerates the transitional tax. This could further aggravate difficult partner exits.
If the firm reserves for tax, then reserving policies will need to be reviewed and updated. Partner distributions may need to be slowed, which is unlikely to be popular.
Other questions include: Should interest be paid on tax reserve balances? Can partners opt to pay their instalments early? If they do, where does the firm or partner find the extra cash?
It’s not inconceivable that if tax rates changed – for example if there was a change of government – partners would want to pay their outstanding tax bills at the lower tax rates. Ideally, there will be scenario planning and firms and partners will have decided in advance how to address different challenges. Constitutional documents will need updating.
Planning for these eventualities requires strong engagement and ongoing dialogue between the individual partners and the firm. If it hasn’t already begun, this needs to start sooner rather than later.