By David Threlkeld, accounting partner, Armstrong Watson
New legislation that affects how sole traders and partnerships are taxed is due to come into play on April 6 2024.
It means that businesses will be taxed on profits generated in a fiscal year and not those aligned to the business’s accounting year-end.
Who does the change in basis period impact?
It applies to anybody who is self-employed – sole traders and partnerships – with an accounting year end other than 31 March to 5 April. It does not apply to companies.
From which year does this take effect?
We are coming to the end of the transitional tax year 2023/2024 but if you are yet to look into this, there is still time. The issue comes when you need to submit your tax return for the year to April 5 2024 (any time up until January 31 2025).
Currently, you can choose any accounting year end you wish. For the tax year ended April 5 2023 this could be anywhere between April 6 2022 and April 5 2023.
For profits generated in the transitional year, regardless of what your accounting year end is, you will be taxed on the profits you generated in the year ending April 5 2024.
Do I have to change my accounting year end?
No, but if you decide to keep a year end other than March 31-April 5, when you get to the date for submitting your tax return and you haven’t done the accounts for the second part of that period, you will need to put an estimated profit on that tax return and then go back and correct it once you know the actual profit.
Using estimated profits has some consequences:
- It is more hassle and expense to effectively do the tax return twice
- There is more scope for underpaying or overpaying tax. If the profit in that set of accounts is higher than predicted, you’ve probably underpaid tax and might end up with an interest charge
Therefore, if you’ve got a year end late in the year, October or after, for simplicity, changing your year end to March 31 should be considered.
Why you might keep your accounting year end?
If a particular year end suits your business commercially and practically, you don’t have to change. For example, a beef and sheep farmer may be in the middle of lambing on March 31 and would not want the hassle of doing a stock count on that date. Could the timing of a major purchase of plant machinery in this transitional year of have an impact?
If you are considering buying a new tractor this spring, it could be beneficial to purchase it in March, rather than April if you are going to change your year-end, otherwise you would only be getting a proportion of your capital allowances.
How soon do I need to make a decision on whether or not I will change my accounting year-end?
Your year end and the figures need to be looked at in detail before the next tax filing season, so you need to be looking at it as soon as possible. The sooner, the better.
If you think you might change your accounting date to March 31, but you’re not sure, it would be wise to get some stock figures up to March 31, just so you’ve got them if you do change and they are needed. Either way this will give you more flexibility.
Tax simplification?
This isn’t something we can ignore. Regardless of whether you change or not, there are going to be challenges and you will still have to adapt to HMRC’s incoming changes.
While this change brings about little benefit to the taxpayer, it aims to simplify the taxation of unincorporated entities and ultimately means for HMRC the receipts of tax for such businesses will be accelerated.
Could this be the first step along the way to the self-employed and partnerships paying tax more frequently? Only time will tell.
For more information and advice about the change in basis period please contact 0808 144 5575 or email help@armstrongwatson.co.uk
