Basis Period Reform for Partners and the Self Employed

Currently unincorporated businesses are taxed using the accounts that end in the tax year, but in anticipation of Making Tax Digital for Income Tax this is to be changed to tax the profits arising in the tax year irrespective of the date to which accounts are prepared.

This change will impact all sole traders, partnerships and LLP’s where the annual accounts are drawn up to a date other than 31 March to 5 April.

Although the change only applies from 6 April 2024, there are transitional arrangements to facilitate the move to the new basis which affect the 2023/24 tax year.

For example, an business that currently uses a calendar year for its accounts will be taxed as follows:

2022/23     Year ended 31 December 2022

2023/24     Year ended 31 December 2023 plus 3 months of the accounts to 31 December 2024, i.e. a total of 15 months profits

2024/25     Year ended 5 April 2024, calculated using 9 months of the accounts to 31 December 2024 plus 3 months of the accounts to 31 December 2025

The profits for 2023/24 are reduced by the amount that profits that have been previously taxed twice, called overlap relief.  As this may have arisen at the start of the business when profits were likely to be lower the taxable profits for 2023/24 may be much higher than usual.

To overcome the impact of additional profits being taxable in the transitional year, 2023/24, it is possible to spread the extra profits over 5 tax years, but it may be prudent to consider sooner rather than later the likely impact for the forthcoming tax year especially as this change will be affected by the profits arising in some current accounting periods.

For sole traders and partnerships that prepare annual accounts to a date other than the end of the tax year it will be important to consider whether action should be taken to accelerate income into the current accounting period or defer expenditure into the following period.

HWB will be pleased to work with you to review the impact on your tax position as this change progresses.  For further information, please contact Alan Rolfe on 023 8046 1235.