UNINCORPORATED BUSINESSES
From 6 April 2024, there is a change to the way that business trading income is allocated to tax years for income tax purposes: ‘basis period reform’. This means that businesses are taxed on the profits arising in the tax year, rather than their accounting year.
It impacts only unincorporated businesses — the self-employed and partnerships — and within these groups, it only affects those that do not use a 31 March or 5 April year-end. It does not impact companies.
In the long run, the change is meant to mesh in with the Making Tax Digital for income tax programme and provide a better digital experience.
In the short run, for many businesses, it will accelerate their tax liability. The 2023/24 tax calculation for businesses not using 31 March or 5 April year-end will be based on a longer period than usual: profits to the end of the normal accounting period, plus a proportion of profits from the end of the accounting year to 5 April 2024.
Provisions exist to minimise the impact, by using overlap relief (where available), and spreading the ‘additional’ profits over five years. However, the change is still likely to mean higher tax bills in 2023/24 and the following four years. There are also associated changes that will be needed to prepare yearly accounts and tax returns.
For some businesses, the solution will be to change the accounting year end to 31 March; though this will not be an option for every business. It may not be viable for seasonal businesses, or those with international reporting requirements, such as large professional partnerships, for example.
The consequences of basis period reform will vary depending on your circumstances. We will be pleased to help you take stock of the position now, looking at the effect on cash flow, checking any possibility of being pushed into higher bands of income tax, and advising on damage limitation strategies where appropriate.