Basis Period Reform: Overlap Relief

Basis Period Reform: Overlap Relief

Welcome back to our three-part series discussing basis period reform, where we are dissecting all aspects of the change. In part 1, we outlined the relationship between a business’ chosen accounting date and its tax obligations. 

This week, we will discuss overlap relief and how it can be utilised during the transition to the new tax year basis.  

Overlap relief 

What overlap relief can I offset? 

Businesses must offset all the overlap relief they are entitled to in 2023/24. If they do not, they will not have a further opportunity to do so in the future, and all entitlement to overlap relief will be lost. 

Overlap relief may have arisen when the business started to trade (when the current year basis meant they may have been taxed twice on the same profits) or from a past change in accounting date. If the business is old enough, it may also have transitional overlap relief available from the switch over to the current year basis in 1996/97. 

The amount that can be deducted in 2023/24 is the amount that would have been deductible had the business ceased that year. Relief can also be claimed for any overlap relief which could have been deducted in a previous year, when there was a change in accounting period but it was not claimed for any reason. 

How can I find out my overlap relief figure? 

If a business does not know what overlap relief they are entitled to, they can request this information from HMRC. The easiest way to do this is to use the dedicated online g-form. Businesses will need to sign in with the Government Gateway user ID and password they use for self-assessment. They will also need to provide certain details, including their UTR, the date or tax year in which they started to trade, and details of any previous changes in accounting period. 

Once the g-form has been completed, HMRC should be in touch within 15 working days (though this may be longer for complex cases). If the overlap relief figure was previously reported on a tax return, HMRC will provide the figure reported. Otherwise, they will provide the relevant tax return figures to enable the business to calculate the overlap relief themselves.  

If a business is unable to use the g-form, overlap relief details can also be requested over the telephone. However, the g-form will be the quickest route to receiving an answer and should therefore be used wherever possible. 

In all events, the amounts entered onto the 2023-24 tax return in respect of overlap relief are a self-assessment. Businesses should therefore be comfortable that the amount of relief they claim is reasonable, and as accurate as possible. 

Spreading 

When can I spread excess profits? 

Spreading is a method of alleviating the tax impact of additional profits being brought into account as a result of the basis period reform transitional rules. 

As mentioned previously, overlap relief should be deducted from any transition part profits in 2023/24. Any remaining additional profits after this are referred to as transition profits and can be spread over upcoming periods for up to five tax years. 

How does spreading work? 

The default is that 20% of the transition profits should be brought into account in 2023/24, and a further 20% in each of the following four tax years. 

However, it is possible to accelerate the amount of transition profits considered in any one tax year. The business can choose any additional amount to consider. Any remaining transition profits will then be spread equally over the remaining spreading period (subject to any further election in one of those years). 

This ability to accelerate the amount of transition profits brought into account may be particularly useful if a taxpayer is subject to a lower level of tax than usual in any tax year (for example because they have a large expense or lower income that year). 

This election must be made on the self-assessment return, and the deadline is one year after the filing date for that return. 

 How can we help?  

Offset relief is quite a complex topic and it may be difficult to decide on how best to utilise it. For support with this, please don’t hesitate to get in touch our Commercial Client Director, Fabrice Legris, at fabrice.legris@fiandertovell.co.uk 

Join us next week for the final part of our series on basis period reform! 

 

Basis Period Reform: Understanding the Changes & Implications

Basis Period Reform: Understanding the Changes & Implications

Basis period reform represents a major change in how the trading profits of unincorporated businesses (such as sole traders and members of partnerships) are calculated for income tax purposes.  

In this three-part series, we look to breakdown the changes involved with basis period reform. Kicking off with part one, where we shed light on the change and how it represents a fundamental conversion in the relationship between a business’ chosen accounting date and its tax obligations. 

What’s changed? 

Since 6 April 2024, a new ‘tax year basis’ of assessment has applied to the trading profits of unincorporated businesses, such as sole traders and partners subject to income tax.  Under the tax year basis, such businesses will be taxed on the profits arising in each tax year (6 April to the following 5 April), regardless of their accounting period end date. 

This will replace the ‘current year’ basis, under which the tax for any one tax year is calculated using the profits of the accounting period ending in that year. Basis period reform therefore effectively breaks the link between the accounting date chosen by your business and when you are taxed on your profits. 

The tax year 2023/24 represents a transitional year, in which we switch over from the current year basis of assessment to this new tax year basis. 

 Who is affected? 

  • Self-employed traders  
  • Partners in trading partnerships  
  • Trusts and estates  
  • Non-resident companies with trading income charged to income tax 

Any business already drawing their accounts up to 31 March or 5 April (or any date in between) will also be unaffected.  

 How will the tax year basis work? 

Under the tax year basis, businesses will be subject to tax on their profits arising in the tax year (i.e. from 6 April to the following 5 April). As noted above, if a business already draws accounts up to 31 March or 5 April (or any date in between), then this will be treated as the same as the tax year. 

If your business has a year-end other than 31 March or 5 April (or any date in between), you will need to apportion amounts from two sets of accounts to calculate your profits for every tax year from 2024/25 onwards. 

Calculating profits under the tax year basis 

How is apportionment carried out? 

Under the tax year basis, if a business does not draw their accounts to 31 March or 5 April (or a date in between), you will need to time apportion amounts from two sets of accounts to calculate your taxable profits each year. 

The default is that this apportionment is carried out on a daily basis.  For example, for the tax year 2024/25, a business with a 31 December year-end will need to apportion: 

  • 270 days from the year ended 31 December 2024; and 
  • 95 days from the year ended 31 December 2025. 

 However, a different time-apportionment (for example weeks or months) can be used, provided it is reasonable and applied consistently. 

The Transitional Year (2023/24) 

Which profits are taxed in 2023/24? 

Tax year 2023/24 is a transitional year, in which we swap over from the current year basis to the new tax year basis. Specific rules apply in the transitional year, which may result in more than 12 months’ worth of profit being taxed. 

 To summarise, in 2023/24, businesses will be taxed on the profits of: 

  • The 12 months starting with the end of the basis period for 2022/23 (the ‘standard part’); and 
  • The period from the end of the standard part to 5 April 2024 (the ‘transition part’) 

For most businesses, the standard part will effectively be the profits they would have brought into account under the current year basis. The transition part will then bring them from the end of that period up to 5 April 2024. 

 For example, a business with a 31 December year-end will be taxed on the profits of: 

  • the year ended 31 December 2023 (the ‘standard part profits’); and 
  • the period from 1 January to 5 April 2024 (the ‘transition part profits’). 

To calculate the transition part profits, the results of the year ending 31 December 2024 will need to be time apportioned. 

How can we help?  

We understand that every business is different, and deciding whether to align accounting periods with the tax year must be considered on a case-by-case basis.  

For more detailed guidance and support with the basis period reform, please don’t hesitate to get in touch our Commercial Client Director, Fabrice Legris, at fabrice.legris@fiandertovell.co.uk 

Join us next week for part two of our series on basis period reform! 

Payroll Fraud Prevention Strategies 

Payroll Fraud Prevention Strategies 

Has your business been a victim of payroll fraud? It’s more common than you might think, resulting in substantial losses, budgeting constraints, and perhaps even loss of trust in the workforce. The main issue faced by employers is – payroll fraud can take several forms and the methods are constantly evolving! 

Businesses across the nation are in a constant strive to avoid payroll fraud. After years of working in the payroll industry, we’ve seen it all by now. Even better; we’ve developed a number of strategies to help identify and prevent payroll fraud, keeping your business’ finances safe and sound. 

What is payroll fraud?  

Payroll fraud occurs when an individual unlawfully secures payment from an employer through deceptive means. This can be through various forms, including counterfeit national insurance numbers, submission of fraudulent documentation, falsely claiming eligibility to work in the country, or identity theft.  

It can also happen through exaggeration of hours worked by an employee or claiming expenses that they are not entitled to. This form of fraud is more difficult to detect than those above, however, it results in a loss of money and severely affects your company’s bottom line. So, how can you avoid it? 

 Prevention strategies 

Background checks  

Perform thorough background checks on all personnel tasked with preparing, submitting, and accessing the organisation’s payroll and accounts. This measure ensures that individuals hired for these roles are trustworthy and maintain high levels of integrity. 

Reviewing payroll reports  

It’s advisable to review payroll reports post-processing to verify that employees are receiving accurate pay. Additionally, cross-referencing employees’ addresses and bank account details is crucial to detect any instances of multiple payments to a single bank account, a common method of perpetrating payroll fraud. 

Limit unauthorised access to payroll information  

In organisations, it’s considered a best practice for individuals with a genuine need to access payroll data to be granted individual login credentials. Each employee should receive their unique login information for accessing payroll data, accompanied by a policy strictly prohibiting the sharing of passwords. 

Separate your processes 

For smaller businesses, it can often be the case that one person is responsible for several functions. Particularly within HR and payroll, where one person is often responsible for managing both. However, we recommend separating the two. This means that payroll processes can be verified by multiple people, rather than one person taking care of the whole process. This will help to ensure all payments are processed correctly and are therefore less vulnerable to fraud. 

Outsourcing payroll  

Lastly, one of the best ways to avoid payroll fraud is… to not do your payroll. While this may sound strange, outsourcing your payroll to a specialised team will ensure your payroll is processed accurately and safely. It’s a more efficient and cost-effective way to keep your employees paid.  

At FTPay, we take payroll out of your hands and into our in-house payroll bureau, staffed by experienced payroll operators. We can assist you in maintaining your payroll, meeting HMRC regulations, and most importantly – avoiding any forms of payroll fraud.  

 And there are our top strategies for payroll fraud prevention. Our help, however, doesn’t stop here. Our team of advisors are on hand to help you with any payroll queries should you need assistance. If you’re looking to outsource your payroll, please get in touch with our Commercial Client Director, Fabrice Legris, at fabrice.legris@fiandertovell.co.uk.  

Importance of Financial Planning: Key Considerations

Importance of Financial Planning: Key Considerations

While owning a business can be rewarding, there’s no doubt that it can be a stressful experience. It can feel like you are constantly putting out fires everywhere you go. While there are lots of issues beyond your control, financial planning is an area which, thankfully, can be managed.  

However, while financial planning can be handled with less turbulence, it still requires a comprehensive strategy. At Fiander Tovell, we can provide you with all the tips to navigate the intricacies of financial planning to establish an effective plan tailored to your business’s needs.  

In this blog, we break down just some of the guidance from our experienced team to steer clear of a financial crisis.  

Separating personal and business finances  

A common mistake we see is businesses using a single bank account to manage everything. Not only does this cause confusion, but you can also end up in legal trouble. This could leave you (as the owner) personally liable for all your company’s debts and liabilities. We suggest creating a separate bank account and obtaining a distinct credit card solely dedicated to your business. This segregation facilitates streamlined tracking of expenditures, simplifies tax calculations, and ensures the maintenance of transparent financial records. This active management serves as a protective measure for your personal assets against potential business liabilities.  

Tracking your money 

Now that you have separated your finances, you will have an overview of cashflow. Tracking your money becomes much more manageable, which is essential for understanding where your business stands financially and for making informed decisions.  

With Fiander Tovell, we can analyse your cash flow statements to identify trends, patterns, and potential areas for improvement. This analysis provides us with essential data for creating financial plans tailored to your business. Overall, understanding your expected cash inflow and outflow allows you to make decisions surrounding investment, expansion, and other strategic initiatives.  

Establish and Review Budgets 

Budgeting is a cornerstone of financial planning, enabling you to allocate resources effectively and prioritise spending. Take the time to establish realistic budgets for your business, and regularly review them to track performance against targets. This proactive approach will help you identify areas for improvement and adjust as needed to stay on track. 

Manage Accounts Receivable and Payable 

Efficient management of accounts receivable and payable is critical for maintaining a healthy cash flow. Implementing strategies to accelerate receivables, such as offering incentives for early payment, and negotiating favourable payment terms with suppliers can help optimise cash flow. Our team can work with you to develop tailored solutions for managing accounts receivable and payable effectively. 

Planning for the Future 

Successful financial management isn’t just about the present—it’s also about planning for the future. Whether it’s investing in growth opportunities, saving for expansion, or preparing for unforeseen challenges, having a comprehensive financial plan in place is essential. Our experts at Fiander Tovell can assist you in developing a strategic financial plan that aligns with your business goals and sets you up for long-term success. 

By implementing our tips for better financial management and planning, you can take better control of your business’s finances. At Fiander Tovell, we’re committed to helping business owners like you achieve their financial goals. Our team is here to support you every step of the way. 

If you would like to enquire about our services or would like more information, please contact our Commercial Client Director, Fabrice Legris, at fabrice.legris@fiandertovell.co.uk 

Cash Flow v Profit: Why both matter and how to balance them

Cash Flow v Profit: Why both matter and how to balance them

Cash flow and profit; two concepts that may at first seem interchangeable, before realising that they are each distinct metrics of success. Understanding their differences is crucial for establishing financial mastery and we can’t stress their importance enough. 

At Fiander Tovell, our bookkeeping services help you to visualise your business’ cash flow and profits, using each to identify how your business is performing. So, what exactly are the differences? 

Cash Flow

As suggested by its name, cash flow encompasses the flow of money in and out of your business within a defined timeframe. It comprises three primary categories: operating, investing, and financing. 

Operating cash flow represents funds directly linked to the production and sale of goods or services during regular business activities. These numbers gauge whether your business generates sufficient income to meet financial obligations and cover typical operating costs. 

Investing cash flow is the amount of money spent or generated from investment-related opportunities. Often, companies will see negative cash flow within investments, however this isn’t necessarily an issue considering they are for future gains. An example of this would be research and development (R&D). 

Financing cash flow reflects the net movement of cash allocated for both business operations and capital. Unlike operating cash flow, financing encompasses all transactions such as debt issuance, equity, and dividend payments. This metric aids investors in assessing a company’s financial health and managerial effectiveness from a financial perspective. 

Overall, understanding your cash flow is crucial to the success of your company. A healthy cash flow means you can cover all your costs without straining your budget, as well as providing you with the flexibility to branch out for new ventures.  

Profit

Profit represents the financial gain a business achieves after subtracting all expenses from its revenue. There are three key types of profit: gross profit, operating profit, and net profit. Understanding these types is essential for assessing business profitability and overall health. 

Gross profit is the initial indicator of profitability, calculated by deducting the cost of goods sold from the sales figure. 

Operating profit delves deeper into profitability by subtracting operational costs like rent, utilities, and employee wages from the sales figure. 

Net profit, also known as the bottom line, is the ultimate figure obtained after deducting all expenses, including interest and taxes, from sales revenue. It provides a comprehensive view of the business’s true profitability. 

Understanding these profit levels is crucial for obtaining an accurate assessment of your business’s financial health. While a healthy gross profit may indicate success, accounting for operational and net costs reveals the true profitability of your business. 

Key Differences

Cash flow pertains to the inflow and outflow of money within a designated period for your business. On the other hand, profit is what remains from your revenue after subtracting various costs such as operational expenses and taxes. 

A common mistake we see from businesses is the perception that profit is the main indicator as to how their business is doing. We don’t want to burst your bubble, but large profits do not necessarily equate to a strong business. While profits certainly showcase short-term success, cash flow can provide a comprehensive view of how well your business is doing.  

For example, your business can be profitable but have a poor cash flow. Insufficient cash flow can hinder your ability to fulfil essential payments required for producing goods, such as paying suppliers and staff. Even if your business is profitable and your product is in demand, inadequate cash flow may lead to operational stalling. 

On the other hand, a good cash flow with poor profits may indicate that your business isn’t sustainable in the long run. This may make you consider other profitable avenues to seek, such as a more cost-effective way to produce your product.  

Our advice  

At Fiander Tovell, we outsource our bookkeeping services to help companies maintain a healthy cash flow. This is done remotely through our online accounting and data capture software to keep your company on track. Our specialists provide expert and efficient services, thereby adding substantial value to your business. Moreover, entrusting your bookkeeping to external experts significantly mitigates compliance risks.  

You can find out more about our outsourced bookkeeping services here. Alternatively, please get in touch with our Commercial Client Director, Fabrice Legris at fabricelegris@fiandertovell.co.uk.