Are you self-employed or a partner in a trading partnership? If so, it’s essential to understand the tax basis period change that applies to unincorporated businesses.
HM Revenue & Customs (HMRC) has proposed changes that will affect how businesses are taxed. The shift will move from a ‘current year’ basis to a ‘tax year’ basis. Businesses with a year-end that falls outside of 31 March to 5 April may face a larger tax bill for the 2023/24 tax year.
What is the tax basis period change?
Self-employed individuals and partners in trading partnerships generally prepare their accounts on a fixed date each year. This date is known as the ‘basis period.’ For tax purposes, businesses are currently taxed on profits for the period ending in the tax year, even if that year ends on a different date.
>From the 2024/25 tax year, all businesses will transition to a tax year basis, with the year-end period from 31 March to 5 April aligning with the tax year-end. This means businesses will pay tax for the 2024/25 tax year based on profits earned in that year.
Why is the tax basis period change important?
The tax basis period change means that all self-employed businesses and partnerships with a different year-end will be required to pay tax earlier than before. This could impact tax planning, cash flow and overall financial strategy. The transition year (2023/24) will be particularly challenging for some businesses, as they will be taxed on both their current basis period profits and any additional profits from the end of that period until 31 March/5 April 2024.
>For example, a business with a year-end of 30 June will be taxed for the 2023/24 tax year on profits from 1 July 2022 to 31 March 2024. This effectively means the business will pay tax on 21 months of profit rather than the usual 12 months. While there is an option to spread the additional tax burden, it may still result in higher tax bills over the next few years.
How will this affect your business?
The transition to the new tax basis period may result in a higher tax bill for some businesses. Businesses will need to be prepared for the fact that they may be taxed on a larger amount of profit during the 2023/24 tax year. This may require careful planning and budgeting to manage the impact on cash flow and avoid unexpected tax liabilities.
>Some businesses may also have overlap profits carried forward from previous years, which could be deducted from the taxable amount in the 2023/24 year. However, the spreading of transition profits may result in higher-than-usual tax bills for the next five years.
How can you prepare for the tax basis period change?
The key to managing the tax basis period change is early preparation. If your business year-end is not between 31 March and 5 April, you could be taxed on more than a year’s worth of profits in the 2023/24 tax year. Even with the option to spread the excess tax, your tax bill could be significantly higher than usual.
To mitigate this, it’s important to start planning as soon as possible. Work with your accountant to forecast the potential impact and explore strategies to ease the transition. The sooner you begin preparing, the smoother the change will be.
Talk to our tax advisers
If your business is affected by the tax basis period change, our team of tax advisers can help. We provide guidance on how to manage the impact of the changes. This includes preparing forecasts and advising on the best strategies to minimise your tax liabilities.
Contact us today at 0161 761 5231 or email theteam@horsfield-smith.co.uk for expert advice on navigating the tax basis period change.
