In a move likely to reshape the financial landscape for self-employed individuals and partnerships in the UK, the government is set to change the tax year basis period from April 2024. In addition to complying with these new rules, the change could significantly impact how much tax individuals have to pay. In this article, we'll highlight the key factors self-employed individuals and those in partnerships must bear in mind as they get to grips with the new rules.

Understanding the change in tax year basis period

The change in the tax year basis period aims to have all UK sole traders/self-employed taxpayers and partnerships have an accounting year end which aligns with the tax year end.

Many self-employed people and partnerships already have an accounting year end that coincides with the tax year end, and these taxpayers will not be affected by the new rules. For those traders who have a different accounting period, for example, 1 January to 31 December, they will have to change their accounting period from April 2024. However, there is a transitional period that they can adopt.

The change does not apply to incorporated businesses.

The timings of the changes to the tax year basis period

The basis period changes were announced during the 2021 Autumn Budget, at which point the following timetable was set to implement the changes:

  • Tax year 2022/23 – was the final year of the 'current year basis' rules.
  • Tax year 2023/24 – is the 'transitional period', where taxpayers can choose when to change their accounting year end to align with the tax year.
  • Tax year 2024/25 – will be the start of the new 'tax year basis' rules.

While the actual tax year runs from 6 April to 5 April the following year, the new rules will accept qualifying businesses having an accounting year end between 31 March and 5 April.

For those who don't have coterminous accounting and tax year ends, the changes could significantly impact how much tax they have to pay, and the tax calculation is more complicated.

Challenges in tax computations

Under the 'current year basis', an individual taxpayer with a business year end of 31 December 2022 would include their taxable profits on their 2022/23 self assessment tax return.

Under the new 'tax year basis' rules, the same taxpayer with an accounting year end of 31 December 2024 will have to apportion any profits across the 2023/24 and the 2024/25 tax years. In practice, this would involve 3/12 of the profits on the 2023/24 tax year return and 9/12 of the profits on the 2024/25 tax return.

Changes during the transitional period

As mentioned earlier in this article, the initial announcement relating to the change on basis period identified the 2023/24 tax year as the 'transitional period'.

During this period, businesses who have to change their accounting year end to be coterminous with the tax year could find themselves having to pay two lots of tax, the first amount relating to any profits made using the 'current year basis' and additional tax amount based on any profits realised between the end of the accounting year end and the start of the new 'tax year basis' on 5 April 2024.

In effect, businesses may be paying two lots of tax in one go.

To help businesses that fall into this bracket, HMRC is allowing them to spread profits made from the end of their accounting year end to the tax year end over the next five years. The aim is to reduce any negative impact on a business's cash flow.

Ways to reduce the impact of the tax year basis changes

For businesses affected by these changes, there may be steps they or their accountant can take to help reduce their tax bills. These include:

  • Using overlap profits against the transitional profits to reduce tax liabilities.
  • Spreading income and expenses across different accounting periods to help smooth out fluctuations in taxable income and mitigate the impact of sudden financial changes.
  • Choosing the right time to change their year end, which should take on board their business's cycle, seasonal variations and financial performance trends.

The importance of proactive planning

Proactive planning is crucial in adapting to the changes introduced by the new tax year basis period. Businesses should engage with their accountant well in advance to assess the implications of their specific circumstances. This ensures that any adjustments or changes are implemented smoothly, minimising tax and cash flow issues and the risk of non-compliance.

The upcoming change in the tax year basis period in the UK demands careful consideration and proactive planning from self-employed individuals and those in partnerships. By understanding the implications of the shift, strategically using tools like overlap profits and spreading, and making informed decisions about year-end dates, affected taxpayers can navigate this change effectively.

How DWilkinson&Company can help

The tax basis period change could significantly impact many businesses in Leeds. If you are concerned about these changes, please do get in touch. We can review your circumstances and suggest ways to mitigate receiving large tax bills in the future. Please get in touch with us on 0113 320 0001 or email office@dwco.co.uk.