Basis Period Reform – for self-employed individuals and all partnerships / partners

New legislation taking effect in 2023/24 will affect non-corporate trading businesses that prepare accounts to a date other than 31 March or 5 April.

The new rules will alter how the taxable profits of accounting periods are matched into tax years for the purposes of self-assessment profit reporting and income tax calculation.

At the moment, when reporting taxable profits for a tax year, it is necessary to report the taxable profits coming from the accounting period that ends in the tax year in question. For example, a sole trader preparing accounts to 30 June, would usually use the taxable profits from his/her year to 30 June 2021 as the basis of their 2021/22 income tax self-assessment.

From tax year 2024/25 onwards, a new ‘tax year basis of assessment’ will apply. This is not a requirement to prepare accounts to 5 April each year (although a business could choose to do so) but instead will require an apportionment of the tax adjusted results from each accounting period that overlaps into the tax year in question.

For example, a sole trader preparing accounts to 30 June will need to take the tax adjusted results for 30 June 2024 and 30 June 2025 and:

• Calculate 3 months (3/12ths) of the 30 June 2024 tax adjusted results; and
• Add 9 months (9/12ths) from the 30 June 2025 tax adjusted results,

to create a tax adjusted profit/loss figure for the year to 5 April 2025.

The tax year 2023/24 will be a transitional year where, in addition to the accounting results that are brought into account under the current rules, a ‘transitional component’ will also be added in to ’stretch’ the reported taxable profits from the end of the usual accounting period used as the basis to 5 April 2024. If the business is holding something called ‘overlap profits’, these are then deducted in full by way of ‘overlap relief’.

In an attempt at fairness, spreading rules will potentially spread any accelerated profits (and therefore accelerated tax payments) over five tax years, starting in 2023/24.

This area is complicated so please talk to us about your options ahead of the changes, we are here to help!

Big Tax Bills for the Self-Employed in 2022/23

Earlier this month we mentioned that draft legislation has been published to change the basis periods for the assessment of self-employed profits to coincide with the tax year. The proposed new rules provide that from 2023/24 onwards profits or losses will be apportioned to tax years where the period of account does not coincide with the tax year. This is intended to coincide with the start of Making Tax Digital for income tax.

The transitional rules proposed for the previous 2022/23 tax year could result in large tax bills for some sole traders and partners, particularly those with an existing 30 April year end.

The profits of year ended 30 April 2021 would be taxed in 2021/22 under the current rules with 2023/24 taxing profits arising between 6 April 2023 and 5 April 2024 under the new rules. But what about 2022/23?

The profits taxed in 2022/23 would be those for year ended 30 April 2022 plus the period 1 May 2022 to 5 April 2023 - in total 23 months profits!

The good news is that there would be a deduction for 11 months “overlap relief” which typically arose when profits were taxed twice at the start of the business - but those will often be much lower than the extra 11 months being taxed in 2022/23!

The transitional provisions allow the taxpayer to elect to spread the excess profits over the next 5 tax years to smooth out the excessive tax bill.

We can work with you to advise you on how much to set aside to cover these additional tax liabilities.

6th August 2021 – Hillmans Weekly Update

Below I have summarised all the main tax related updates we have seen this week.

• Coronavirus Job Retention Scheme – Update
• Self-Employment Income Support Scheme update
• Abolition of Basis Periods and New Tax Year End?
• MTD Coming Soon for Income Tax

If you have any queries about this week’s content, or if you need any assistance please do not hesitate to contact me.

I hope you have a great weekend. 

Stay safe and well. 

Cheers,

Steve

Steven Hillman BSc (Hons) ACA
Chartered Accountant
Tel: 01934 444100

Abolition of Basis Periods and New Tax Year End?

We are awaiting further information on MTD from HMRC this summer but one significant announcement on 20 July was draft legislation to abolish basis periods for unincorporated businesses for the 2023/24 tax year to simplify MTD reporting.

That change would apply to sole traders, partnerships, as well as trusts with trading and property rental income. There would also be complicated transitional rules for 2022/23 which could result in a big tax bill that year for some traders.

The Treasury are also consulting on changing the tax year itself from the archaic 5 April year end to 31 March or even 31 December. A calendar tax year would bring the UK into line with most other countries at last!

We will keep you updated when more information comes available.