HMRC has issued guidance on changes to reporting income affecting self employed, sole traders and partnerships under the basis period tax year where the accounting period and tax year differ.
Basis period reform affects partnerships and self employed people whose accounting year does not end on or between 31 March or 5 April.
Up to 5 April 2023, the basis period reporting rules applied. This means profits were reported in line with the business accounting year end date within the relevant tax year.
From 6 April 2023, the new tax year basis applies. This means profits will need to be reported up to the tax year end, even if the accounting year ends at a different time. As a result profits may need to be apportioned between accounting periods.
The 2023-24 tax year is known as the ‘transition year’. This means sole traders and partnerships will have to:
report profits covering more than one year; and
may need to apportion two sets of accounts to estimate the profits for the year.
For example, for those with an accounting year end date of 31 December 2022, profit will be reported from 1 January 2023 to 5 April 2024 in the 2023-24 tax year.
If the reported profits covers more than 12 months, the excess is known as ‘transition profit’. This can be reduced by overlap relief and any remaining profit will be spread over the following years, up to the tax year 2027-28.
HMRC has not published guidance about how to deal with overlap relief but said it planned to do so ‘shortly’.
If the business accounting year ends on or between 31 March to 4 April, the accounting year can be treated as if it ends on 5 April. These profits can be reported without apportioning for the five days after 31 March.
The Association of Taxation Technicians (ATT) has urged businesses that may be affected to consider their tax liabilities in the coming years, and whether aligning their accounting year with the end of the tax year could make things simpler for them in the future.
Jon Stride, vice chair of the ATT technical steering group said: ‘The transitional year rules could see a temporary increase in the tax payable by businesses without a 31 March or 5 April year end. However, that is not the end of the story, because these businesses could also experience ongoing additional administrative burdens unless they change their year end going forwards.
‘If they don’t change their accounting date, they will have extra work to do each time they complete a tax return, because they will need to combine the amounts from two separate sets of accounts. What’s more, depending on how late the accounting date falls, the second set of accounts may not even be ready by the time the tax return is due and profits will need to be estimated.
‘To avoid these ongoing administrative burdens businesses can change their accounting date to 31 March or 5 April. This can be done by drawing up a set of accounts for a longer or shorter period than usual, ending with the new accounting date.
‘Before making any change, you need to weigh up what’s best for your business overall alongside the tax issues. For more help, speak to an accountant or tax adviser.’
Author: Sara White