Basis Period Reform

With the introduction of Making Tax Digital for Income Tax (MTD ITSA) which comes into force from April 2024, HMRC is also requiring businesses subject to income tax to change the basis period on which their business profits are taxed on each year. 

As it stands, sole traders and partnerships are taxed on a ‘current year basis’ which means profits are subject to tax in the year in which their accounting year ends e.g. profits in an accounting year to 30th June 2022 will be assessed to tax in the 2022/23 tax year. 

From April 2024, HMRC will require businesses to be taxed on a ‘tax year basis’. Sole traders and partnerships already preparing accounts to 31st March / 5th April won’t be affected by these changes. 

For businesses that do not draw accounts to 31st March / 5th April, there are two key points: 

  1. The 2023/24 tax year will be a transitional period – as well as being taxed on profits on the current year basis (e.g. 30th June 2023), profits will also need to be brought in for the remaining period to 5th April 2024. From this, overlap relief will be deducted. Where this produces higher than normal profits, HMRC will allow businesses to spread the additional profit over a 5-year period.
  2. From 2024/25, profits from two accounting periods will need to be apportioned – accounts will need to be apportioned on a just and reasonable basis so profits arising in the tax year are assessed to tax. Where the accounts for the latter period have not been finalised by the annual tax return deadline, provisional figures will need to be included. Professional bodies are currently in talks with HMRC on how to adjust for this once actual figures are known. It may be the case that an amended return will need to be filed for the earlier period!

If you have any queries or wish to discuss the impact of these changes, please do not hesitate to contact me.