Change to “tax year basis”

The Government is determined to change the way that trading profits are reported for tax purposes. Not only is it introducing digital recording and reporting in the form of Making Tax Digital for Income Tax Self Assessment (MTD ITSA), but it is changing the rules by which profits and losses are reported.

From 6 April 2024, all self-employed profits and losses, including from partnerships, will have to be reported on a “tax year basis”. This will only affect unincorporated businesses that draw up their accounts to a date which does not fall between 31 March and 5 April (inclusive). It won’t affect companies but will apply for limited liability partnerships (LLPs).

If your business is affected, you will find that some of your profits are taxed earlier than currently.
In the transitional year (2023/24), you will have to report your profits for the accounting period ending in that year (as usual), plus the profits for the period that runs from the end of those accounts to 5 April 2024.

Sophie draws up her accounts to 30 September. In 2023/24 she must report her profits for the 12 months to 30 September 2023, plus 6 months to 5 April 2024.
For subsequent years, if Sophie does not change her accounting date, she will have to apportion profits from two accounting periods to complete her tax return. This may involve estimating profits from the later period, then amending the return to provide the accurate figures.

To avoid such ongoing complications, many businesses will want to change their accounting year-end to 31 March or 5 April, but this may not be appropriate for certain businesses, including those with seasonal trades. In any event, the rules governing such a change are themselves very complicated.

For the year of transition (2023/24), there are other complexities in the calculations. Most businesses will have ‘overlap profits’ from when their trade commenced. These can be deducted against the extra profits arising in the transitional year, with the resulting excess profits able to be spread over five years of assessment through to 2027/28, rather than being fully taxable in the transitional year.

If the transitional rules produce a loss rather than a profit, there are special rules to enable the loss to generate tax repayments from the preceding three years.

As you can see, there are many issues for unincorporated businesses and LLPs to consider, including:
• whether and in which year to change your accounting date;
• calculating the additional profits that will arise in the transitional year and whether to spread them over 5 years;
• budgeting for the extra tax arising from the transitional rules;
• dealing with any loss relief claims that arise;
• budgeting for the fact that the new rules will speed up when tax on profits earned in an accounting period has to be paid.