Under current rules individuals who are either self-employed or operate through a partnership pay income tax based on their profits of the accounting period ending in the tax year. Draft legislation has been published where by a new ‘tax-year’ basis for determining profits was to be implemented from 6 April 2023, however this has now been delayed until April 2024.
This means that for the 2024/25 tax year all traders will be assessed based on their taxable profits arising during the tax year. As such 2023/24 is likely to be transitional year so traders should be considering now what they should do to prepare for the change.
The proposed change to the basis period for the calculation of taxable profits for the self-employed is now intended to apply from 6 April 2024, but will also impact upon the year from 6 April 2023 to 5 April 2024.
For those individuals or partnership who already use a 31 March or 5 April year end, the change will have little or no impact on their tax bill. However, for others it could well result in an increased tax bill for the period of change although with careful planning some of the effects may be mitigated.
In order to move from the current year basis to the actual tax year basis there will be a transitional period in 2023/24. The profits for 2023/24 year will consist of the profits that would be taxed under the current rules plus the transitional profits. The transitional profits will be calculated on the actual basis from the end of the usual basis period to the end of the tax year, less any overlap relief that is available.
Going forward from April 2024, unless your accounting period ends between 31 March and 5 April inclusive, you will be required to apportion figures from two sets of accounts in order to calculate the correct figure to include on your tax return.
A further issue is that in order to file a return on time it may be necessary to estimate profits. In this situation, it will almost certainly then mean having to later amend the tax return once the final figures are available. This will add additional work in particular for partnerships since both the returns for the partnership itself and those of each partner will need amending.
The solution therefore may be to consider changing the accounting year end of the business to 31 March or 5 April in order to avoid the need to apportion or estimate the figures required for the tax return. However, an individual or partnership may well have a good business reason for maintaining a particular accounting year end already in place.
HM Revenue & Customs are looking at ways to assist businesses make the transition to the new basis smoothly, with one consideration being an election to allow the ability to spread the additional transitional profit over a 5-year period. While changing a financial year end to between 31 March and 5 April will avoid needing to use estimated figures it is worth waiting until further information is announced, and this is expected to be in December as part of the Finance Bill. At this point consideration should be given to any tax planning opportunities arising out of the change.
If you would like more information on how the change of basis period may impact your business, or how the new rules may affect you, please contact our Tax Director, Jenny Marks.
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