Changes to how the tax basis period is calculated for the self-employed and partnerships

Occasionally we like to tell our clients about things that we think are relevant for them. A recent announcement on changes to the way in which the tax basis period is calculated for some businesses is one such topic. So, here's a one minute overview of what we think is important for you to know.

How does it work presently?

At present unincorporated businesses are free to choose their accounting year-end. These profits are then taxed according to the tax year in which the accounting year-end falls. A business with a year-end of 30 September 2021 would be taxed on those profits in the tax year running from 6 April 2021 to 5 April 2022 (2021/22), with the tax payable on 31 January 2023.

The current rules have created a complex system that is difficult to understand, so HMRC want to streamline it.

What are the changes?

HMRC will tax all unincorporated businesses and LLPs on a tax year basis regardless of the accounting year-end. There is no requirement to change the accounting year end of the business, just the way profits are taxed. This is confusing, so we can see a lot of businesses changing their year ends to 31 March.

Will there be a transitional period?

HMRC knows that during the 2023/24 tax year when the new rules are implemented, an increased amount of tax may be payable as more than 12 months of profits can be brought into account. You can offset any overlap profits but, in many cases, these may be considerably lower than current year profits as they were created when the trade was commencing.

Where taxable profits exceed the current year’s profits, excess profits can be spread over five years. It is possible to accelerate the taxation of the spread profits however, they cannot be deferred.

Making Tax Digital for Income Tax

These changes are a forerunner to Making Tax Digital (MTD) for income tax which is due to be introduced from 1 April 2024 for sole traders and landlords and 1 April 2025 for partnerships. MTD sees all sole traders, partnerships, and landlords with turnover greater than £10,000 required to keep records digitally and submit quarterly updates to HMRC.

If you'd like to discuss this

As always, we are here for you. Just get in touch with your usual adviser or contact us through any of the methods on the website.