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.
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 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.
Do I have to change my accounting year end?
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:
June year end - When you come to do your 2024 tax return, the profit that will need to be declared will be made up of two parts - three months of your 2023 accounts (up to June 30) and nine months of your June 2024 accounts. You could probably have your June 2024 accounts done before the tax return needed in January 2025. It is quite acceptable to keep your June year-end, but it will make the completion of your tax return more complicated.
October year end – You will have a very short window to do the October accounts and get them properly put on that tax return before the end of January. If you didn't have the accounts done, you would have to put estimated figures on, and then when you got the accounts done you would have to then revise the tax return.
February year end - You would have 11 months of actual figures and one of estimated figures, so it is less of an impact and you should be able to get it fairly accurate.
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 31 March 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 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
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.
I make pension contributions to reduce my taxable income. How will I know the level of contribution I need to make?
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.
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 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.
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. 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.
For more information and advice about the change in basis period please contact 0808 144 5575 or email help@armstrongwatson.co.uk.
