Tax reform for unincorporated businesses delayed

Businesses facing an increase in their tax bills next year can breathe a sigh of relief now that the Government has pushed back its plan to alter the basis period for one year.

The basis period reform – which will align the tax basis period with the tax year end – was due to be introduced in 2022/2023 but has been delayed after accountancy and tax bodies, including the Institute of Chartered Accountants in England and Wales and the Chartered Institute of Taxation, urged ministers to drop the reform or, at the very least, delay it to give businesses more time to prepare.

The new basis period rules will apply from 2024 to 2025, with a transition year in 2023 to 2024.

The change is expected to affect 528,000 unincorporated businesses - the self-employed, sole traders, partnerships, trusts and estates - who will ultimately pay tax on profits for more than a 12-month period when it is introduced.

Those affected are expected to pay a total of more than £1.7bn in tax and if these businesses are seeing rising profits over the next couple of years, then this tax bill will be greater and could leave a serious hole in some business’s cash flows.

How will it affect your business? 

If you are an unincorporated business then this change only affects you if you have an accounting year which is not 31 March or 5 April. In the past many businesses have chosen a different year end to delay tax liabilities and it is these businesses who will experience “double taxation” i.e. tax payable on a period of profits spanning more than 12 months.

In the transition tax year ending 5 April 2024, affected businesses will calculate their tax on three elements:

1. The tax due on the normal profits up to their normal accounting year end

2. The tax due on the profits from the end of their accounting year end up to the 5 April 2024

3. A reduction for historic overlap profits (these are profits which have been taxed twice in the first year of the business or when the business changed its accounting year end)

In a recent case where the client chose to change their year end to the 31^st March, this brought forward a tax liability of £85,000, which meant the client will need to look at their cashflow to ensure that they have this available in January 2023.

For most unincorporated businesses this will result in additional tax. HMRC has said that the additional tax can be spread over a period of five years to manage the impact on cash flow.

In order to prepare for this future change we recommend talking to us so we can help you budget for these one-off tax charges.