Criticism of Finance Bill leads to amended basis period transitional rules

To enable the move to tax-year basis periods, the 2023/24 tax year will make use of transitional rules; the profits for the accounting period ending in 2023/24 will be taxed along with the profits up to April 2024 (the “transition component”). As with any major change to taxation, some taxpayers would have been adversely affected during the transitional year. For example, a long accounting period could cause an individual’s income to exceed the threshold for the high-income child benefit charge or the abatement of the personal allowance.

To counteract this, the draft rules sought to exclude the transition component from net income within the tax calculation. However, this unintentionally caused a further issue: due to the order that tax reducers are applied in the calculation, certain reliefs could not be used to reduce the tax due on the transition component. 

Following criticism, an amendment has now been made that will allow all income tax reliefs to be applied without increasing the net income. This then allows income tax reliefs including top slicing relief, EIS/SEIS/VCT relief and double taxation relief to reduce the tax on the transition component.