It was announced back in 2021 that from April 2024, businesses, including sole trades and partnerships, would be taxed on their profits arising in the tax year, rather than on their accounting year end. This is referred to as the tax year basis of assessment.
This means that if a partnership has an accounting year end of 30 September, they would need to apportion profits from across two accounting periods in order to prepare the Tax Return. 31 March year ends will be accepted as being a tax year end for these purposes.
The intention of this change was to align with Making Tax Digital for Income Tax Self Assessment (MTD for ITSA). When the announcement was made late last year to defer MTD for ITSA, I presumed that the changes to the accounting period would also be deferred, but it has been confirmed the rules are to be implemented as proposed.
For new businesses there will be little impact, as the first year of trading is already reported as the period to 5 April following the date of commencement. From then on it makes sense to retain 5 April as the accounting year end.
It may, however, be harder for existing businesses to change dates. Historically, for example, farming businesses have tended to have a 30 September year end to allow for the harvest to be dealt with before the need to worry about accounts. Moving their year end to April will cause potential difficulties at their busiest time of year.
Transitional period for tax year basis of assessment
In 2023/24, the transitional period arises for reporting profits.
The Tax Return will report the profits arising in the accounting period ending in the tax year, as normal but will also include profits subsequent to that period and up to 5 April 2024.
As the business has an accounting year end which is not coterminous with the tax year end, overlap profits will have arisen at the start of the business or in the self assessment and these will be deducted from the total profits calculated.
The Transitional Part will then be spread over 5 tax years, unless an election is submitted to accelerate.
| Accounting period | 30 September 2023 | Standard Part | £30,000 |
| Additional tax basis period | 1 October 2023 to 5 April 2024 | Transitional Part | £10,000 |
| Overlap profits | 1 October 2000 to 5 April 2021 | Overlap Part | -£2,500 |
| £7,500 | |||
| Transitional profits taxable in 2023/24 – (£7,500/5) | £1,500 | ||
| Total taxable profits reportable on 2023/24 Tax Return | £31,500 |
Non-trading income is taxed in full and is not eligible for the spreading provisions.
Whilst there is no requirement to change accounting dates, we are working with clients to consider their options. Having non-conterminous year ends will require additional work for the business and their accountants so consideration must be given to the benefits of changing.
HMRC understand that some business will not be able to change due to external factors and so will allow for amendments to be made to prior year reporting but these must be done ‘without delay’ or presumably as soon after the subsequent year end accounts have been approved.
If you would like to discuss whether your business will be affected by these changes, please contact the Tax Team at Lambert Chapman LLP.
Disclaimer
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.