Are you a sole trader or a member of a partnership? Here is what you need to know about the upcoming tax basis period reform.
HM Revenue & Customs (HMRC) is introducing changes to how business profits are assessed. The changes will affect any business not currently preparing their accounts to either 31 March or 5 April. The change will take effect for the 2024/25 tax year, with 2023/24 being a transitional year.
Basis period reform – What you need to know
If you operate as a sole trader or partnership, you will have an established year end date, to which your annual accounts are prepared.
Under current regulations, established unincorporated businesses pay tax on their taxable profits for the accounting period which ends in that tax year.
For example, if your accounting period ended on 31 December 2022, the taxable profits for that year would be reflected on the proprietor’s/partners tax return for the year to 5 April 2023.
Under new regulations, from 2024/25, all unincorporated businesses will be taxed on profits for each tax year, to 5 April (a 31 March year end can be used instead).
This will apply regardless of an individual business’ accounting period.
For the example above where the accounting period ends on 31 December, this change potentially means that the business will have to apportion profits from two accounting periods to fit into the 6 April to 5 April timeline.
Where the required accounts are not finalised, the apportionment will necessitate the use of estimated profits to enable tax returns to be submitted and subsequent amendments following the finalisation of the accounts.
Because of this, it is expected that many businesses will choose to make their accounts up to 31 March each year.
These changes mean that the 2023/24 tax year will be a transitional year. In the example above, a business which previously had a year-end date of 31 December will have prepared its accounts up to 31 December 2022 to form the basis of assessment for the 2022/23 tax year.
If it decides to change its year end date to 31 March, the next accounts will be prepared to 31 March 2024. The accounts covering the 15-month period from 1 January 2023 to 31 March 2024 will form the basis of assessment for the 2023/24 tax year. The business would then prepare accounts annually to 31 March thereafter.
Any businesses affected by this change who were in existence in 1996/97 may have unused overlap relief which has been carried forward, relating to a previous change in the basis of assessment. Any such relief is deductible in the 2023/24 tax year.
As tax liabilities for those businesses who have not historically had a 31 March/5 April year end will be accelerated, HMRC has introduced regulations to allow the spreading of the additional tax burden over five years.
Preparing for 5 April
It is important that you are clear on the accounting date that you will be using going forward. A change will potentially have an impact on your accounting software and the date at which stock valuations are required.
In addition, businesses preparing accounts to 31 March will need to ensure that their records are available for their accountants promptly since there will be only 10 months between the end of their accounting period and the tax return filing deadline.
Need help understanding the changes to the basis period? Contact us today.
