From 6 April 2024, all businesses subject to income tax, will be assessed on the profits arising in the tax year, no matter when their accounts are made up.
Currently, businesses are taxed on the profits ending in the tax year. This change to what is known as the basis period affects anybody who is self-employed – sole traders and partnerships – and where the accounting year falls on a date other than between 31 March and 5 April. Companies are not affected.
For example, consider a Partnership with a 31 December accounts date. For the 2022/2023 tax year, the Partners are taxed on their profits based on the accounts for the year ended 31 December 2022.
2023/2024 is the transitional year
For our Partnership, 2023/2024 will be assessed on the “standard part” being the year ended 31 December 2023 plus the “transitional part” being the apportioned profits for the period 1/1/2024 to 5/4/2024 using the profits for the year ended 31 December 2024 accounts.
Tax returns for the year to 5 April 2024 must be submitted to HM Revenue and Customs by 31 January 2025. This Partnership will have a very short window to do their 31 December 2024 accounts and get them properly put on the tax return before the end of January 2025.
If the accounts are not complete in time for the tax return deadline, then estimated figures will have to be used. Once the accounts are complete, the tax return will have to be revised. Using estimated profits has implications. It is more hassle and expense to effectively do the tax return twice. There is a risk of underpaying or overpaying tax. If the updated profit in that set of accounts turns out to be higher than estimated at the point when the tax return is filed, it is likely that tax will have been underpaid, and there may be an interest charge.
Should you change your accounting date
There is no requirement to change your accounting year end date. In the transitional year, regardless of what the accounting year end is, tax will be charged on the profits generated in the period to 5 April 2024.
For the reasons identified above, businesses that have their accounts date later in the calendar year should consider changing to a 31 March year end.
The change in the way the self employed is taxed has little benefit for the taxpayer but means that tax receipts to HMRC will be accelerated, so there will be cashflow issues for many businesses. For the 2023/2024 transitional year it is anticipated that additional profits will be taxed. These are called the “transitional profits” and there is scope for these additional profits to be spread equally over 5 tax years starting with 2023/2024.
There is a very strong argument for all sole traders and partnerships to extend their accounting date to 31 March 2024. For the Partnership referred to above, they could prepare accounts for their usual accounts date of 12 months to 31 December 2023 and then for the extra 3 months to 31 March 2024, or have a 15 month set of accounts from 1 January 2023 to 31 March 2024.
Key matters to consider
- The 2023/2024 tax return will tax profits to the end of the tax year, rather than the accounting year.
- For many with year end dates not falling between 31 March and 5 April, this will mean extra costs and hassle in assessing the likely profits made in the tax year.
- There is no obligation to do so, but for many businesses it will be worth changing their accounting year end to 31 March.
- Good quality and timely management accounts will help in decision making for year end considerations, getting your accounts and tax returns prepared and having plenty of time to pay your tax by 31 January 2025.
If you wish to discuss how this may have an impact on you and your business, please consult one of our tax experts or the person you liaise with regarding your accounts.