This change, known as ‘basis period reform’, will impact all sole traders and partnerships who do not have a year-end that falls between 31 March and 5 April, and they will effectively find their taxable income is accelerated.
The current tax year 2023/24 is the transitional year and any problems will occur when tax returns for the year to 5 April 2024 have to be submitted. The change means that, in this transitional year, tax will be charged on the profits generated in the year ending 5 April 2024, irrespective of what the accounting year end is.
There is no obligation to change the year end but, in many cases, it will make sense to change the accounting year end to coincide with the tax year.
Businesses who change their accounting period within this
transitional year will benefit from being able to spread the profits from the
additional period over five years. This can help mitigate the cashflow impact
of, in some cases, recognising almost two years’ profits in one tax year.
However, if preferred, the recognition of these profits can be accelerated.
Also, if the individual has any overlap relief from when the business started, or previously changed accounting period, these overlap profits will be available to offset against profits in the transitional year.
For those who do not opt to change their accounting period, you will aggregate a proportion of two sets of accounts when submitting your tax return for the tax year ending 5 April 2024. If the accounts for the second part of that period have not yet been completed, you will effectively have two options. Either file your tax return including an estimate of profits for the second period which will then need to be amended once the accounts are complete, or delay finalising the tax return and risk missing the tax return filing and payment deadline.
In some cases, say for example a business with a February year end, this second option will not be possible. However, due to only requiring an estimate of one month it should be easier to include a more accurate estimate, but this does not negate the need to amend once the actual figures are completed.
This will then likely mean more time, difficulty and therefore costs in assessing the profits for the tax year to either split the profits of two accounts periods or, if including an estimate initially, effectively doing your tax return twice. Also, in the case of partnerships with several partners, this will involve this being done for all associated tax returns.
Furthermore, if using estimated figures, there is also a risk of underpaying or overpaying tax. Once the return is updated for the actual profit in that set of accounts, if this turns out to be higher than estimated at the point when the tax return was first completed, it’s likely that tax will have been underpaid and therefore interest will be charged.
As previously noted, there is no obligation to change; a particular year end might work best for a business due their own circumstances and this needs to be considered independently for your own business.
If you have not already done so, it is important to consider and have discussions with an adviser as soon as possible. There are various points to consider, namely the timing of potential capital expenditure, potential for future pension contributions to reduce tax liabilities and the capabilities of your current accountancy software package.