New legislation that affects how sole traders and partnerships are taxed is due to come into play on 6 April 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.
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.
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 5 April 2024 (any time up until 31 January 2025).
Currently, you can choose any accounting year end you wish. For the tax year ended 5 April 2023 this could be anywhere between 6 April 2022 and 5 April 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 5 April 2024.
No, but if you decide to keep a year end other than 31 March – 5 April, 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 as the examples below highlight:
Using estimated profits has some consequences:
Therefore, if you've got a year end late in the year, October or after, for simplicity, changing your year end to 31 March should be considered.
If a particular year end suits your business commercially and practically, you don't have to change your year end. For example, a beef and sheep farmer may be in the middle of lambing on 31 March and would not want the hassle of doing a stock count on that date
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.
This will need to be an educated guess, depending on how good your management information is. The more up to date this is the better, but even with really good up-to-date accounting software, the accounting profit depends on whether there's any difference in stock for this year to last year and how much machinery you’ve bought this year compared to last. It’s not quite as simple as pressing a button and looking at the software to figure out how much pension contribution you will need to make. It is still quite tricky to forecast.
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 31 of March, but you're not sure, it would be wise to get some stock figures up to 31 March, just so you've got them if you do change and they are needed. Either way this will give you more flexibility.
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. It will be beneficial to speak to your accountant if you have any concerns.
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 receipt 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.