[18.10.23]

As we have mentioned previously, from the 2024/25 tax year all sole traders and partners of unincorporated partnerships must use the tax year as their basis period.  Incorporated companies are not affected by these changes.

At the moment, unincorporated businesses are taxed on a ‘current year basis’, but starting from the tax year 2024/25 we’ll be moving to a ‘tax year basis’.

With the ‘current year basis’, profits are taxed based on the 12 month accounting period that ends in a particular tax year.  For example if an accounting period is 12 months long and ended in December 2022, all the profits generated in that 12 month period were taxed in the 2022/23 tax year.

Under the new ‘tax year basis’, profits generated in an accounting period will be split between the tax years that they fall into. So if a business has a 12 month accounting period ending on 31st December 2024, profits generated in that period will be split between the 2023/24 and 2024/25 tax years.

Here is an example:

Sophie is a sole trader with an accounting period of 1^st January to 31^st December.

Under the ‘current year basis’ – in the 12 month period to 31 December 2022, the business made a taxable profit of £20,000.  As this accounting period ends in the tax year 2022/23, Sophie will include the entire £20,000 taxable profit on her self-assessment tax return for that year.

Under the ‘tax year basis’ – in the 12 month period to 31 December 2024, Sophie made a taxable profit of £24,000.  This accounting period ends in the tax year 2024/25, however, following the basis period reform, Sophie needs to apportion this profit between the two tax years that her accounting period straddles.  This means £6,000 of this profit, ie for January to March will be included within her 2023/24 self-assessment tax return and £18,000 will be included within her 2024/25 self-assessment tax return.

Transition Year

The tax year from 6^th April 2023 to 5^th April 2024 will be a transition period with specific rules. This is essentially a catch-up year in which some businesses could find themselves having to pay additional tax.

In this period, businesses will pay tax on any ‘current year’ profits as they did previously, ie. for the 12 months to the end of their accounting period which falls in 2023/24; and in addition, there may also be a need to pay tax on any profits made in the period between the end of the accounting period and 5^th April 2024 (transitional profits).

Depending on the accounting period, this could mean paying tax on almost two years of; ie. a business with an accounting period of 1^st May – 30^th April could end up paying tax on 23 months of profits – profits from 1^st May 2022 to 30^th April 2023 plus transitional profits from 1^st May 2023 to 5^th April 2024.

HMRC recognises the additional burden this could place on businesses and will therefore automatically spread the transitional profit over the next five tax years to reduce the impact on the business’s cash flow impact.

In addition to this, a business may be able to reduce their transitional profits by deducting any overlap profits the business may have generated when they were first set up.  If your business has overlap profits, your Castletons team will raise this with you.

Should your business be affected by basis period reform, and you would like to discuss this further, please contact Jackie or Andrew.

Castletons Accountants