Are you self-employed? Or are you a partner in a trading partnership? There are proposed changes to the tax basis period for unincorporated businesses.

HM Revenue & Customs (HMRC) is proposing changing how unincorporated businesses are taxed, moving from a ‘current year’ basis to a ‘tax year’ basis. For affected businesses (those that don’t have a year-end between 31 March and 5 April), this could mean a much larger tax bill for the 2023/24 tax year.

What does a change in the base period mean?

Self-employed people and partners in trading partnerships generally prepare accounts for the same fixed date each year. This is the ‘basis period’. For tax purposes, profits are currently taxed in the tax year the basis period ends.

For example, if your business has a 30 June period end, profits for the year to 30/06/2022 would be taxed in the 2022/23 tax year ending 5 April 2023. The tax would then be payable by January 2024.

From the 2024/25 tax year, all business will be taxed on a tax-year basis (with 31 March to 5 April being treated as coterminous with the tax year-end). This means they will pay tax for the 2024/25 year on profits earned in that year.

All self-employed businesses and partners with any other year-end will be required to pay tax earlier than they would previously have done. And this could have a severe impact on tax planning and cash flow!

The 2023/24 tax year is a transitional year in which all affected businesses will be taxed on the profits for their basis period as now, plus the tax on profits from the end of that basis period up to 31 March/5 April 2024.

Some of these businesses will have overlap profits carried forward in their tax returns. This will represent profits considered to have been taxed twice in their earlier years. That overlap profit can be deducted from the combined taxable amounts in 2023/24. Additional taxable profits may be spread over up to five years to reduce the impact.

The change to the base period will simplify reporting requirements as the Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) changes are rolled out. This change to the base period considers all other forms of income for individuals on a tax-year basis, making the whole process easier to administer.

Talk to us about the proposed changes to your accounting period-end!Visit our website or call 01785 248939 and transform your business this year.