From 6th April 2024, unincorporated businesses will move from an accounting year basis to a tax year basis. In short, only profits generated within the tax year will be assessed for income tax instead of their accounting year.
This reform will affect self-employed individuals, partners in partnerships and LLP’s. Income Tax and National Insurance on your profits between your usual year-end and 31 March will be brought forward. However, there are transitional rules which relieve the tax pressure this may create.
When will this happen?
2023/24 – This is a transitional year…
- Businesses that do not have an accounting year end date between 31 March & 5 April will need to recognise 2 profit elements; the ‘standard’ part (the normal accounting period) the ‘transition’ part (from the end of the ‘standard’ part to 5 April 2024).
2024/25 – This is when the new rules come into full effect…
- Accountants and Bookkeepers will need to use the tax year basis for all sole trader and partnership clients.
What actions should you, the tax payer, consider?
- Understand the real impact of these changes on your business.
- Manage the immediate cash-flow impact of the changes.
- Consider changing your accounting date to 31st March to simplify the calculation of assessable profits from 2024/25.
Key Points to take away:
- Effective from 6th April 2024
- A business’s profit or loss for a tax year is the profit or loss arising in the tax year itself, regardless of its accounting date.
- On transition to the tax year basis in the tax year 2023 to 24, all businesses’ basis periods will be aligned to the tax year and all outstanding overlap relief given.
- Changing accounting periods to the tax year may avoid much of the complexity.
Unsure on how this reform may affect you? Speak to our experienced team today.