Insights

It was confirmed in the 2021 Autumn Budget that the blanket change requiring sole traders and landlords to declare profits on a tax year basis will be introduced from April 2024; general partnerships will not be required to enter the system until April 2025. This was a topic we wrote about in September and this latest article explains exactly what is happening and the implications.

For the time being, if you have a business operating as a partnership or unincorporated entity, you can calculate your profits according to either a current year basis based on your choice of accounting period or the tax year, from April to April. This will be changing.

To standardise accounting periods in line with the forthcoming quarterly MTD ITSA (making tax digital for income tax self-assessment) reporting requirements, it will be necessary for sole traders and landlords to switch to tax year periods only from 6 April 2024, with the year from 6 April 2023 to 5 April 2024 being a transitional year. It is anticipated that it will be necessary for partnerships to switch to tax year periods only from 6 April 2025, with the year from 6 April 2024 to 5 April 2025 being a transitional year. The changes were due to come into operation fully on 6 April 2023 but have been delayed due to delays to the commencement of MTD ITSA, which will now commence in April 2024.

Businesses affected will be taxed on their profits arising in each tax year, rather than being taxed on profits made during the accounting period that ends in the tax year, which is how the ‘current year’ basis is calculated.

Businesses affected will be those that operate as a partnership or sole trader and depending on the accounting year-end they currently have in place; it could mean that businesses temporarily pay higher taxes in during the transitional year.

For the Treasury, the change is regarded as positive because it brings forward the tax payment dates for many businesses and of course the government has been spending heavily during the pandemic and needs more revenues. An impact assessment has indicated that this change will generate well in excess of £1.715bn in extra tax over the tax years to 2022/23 to 2026/27 with the potential for additional revenues coming due to the accelerated taxes.

Potential for tax relief and spread payments

Some businesses will have accrued overlap relief, either from when the business initially started or after a change in accounting period. If so, it will be possible to reduce the tax due by offsetting the overlap profits against profits in the transitional year.

To further ease the transition, HMRC will be allowing other businesses that do not have the cushion of overlap relief to spread the cost of the additional tax during the transitional year over five future tax years. This means that the financial implications should be minimal which businesses affected will be relieved about, but the necessary administrative changes will require some forward planning.

Changes to the tax year basis: Worked example

Pete is a personal trainer, and his annual profit is £50,000 per year.
His accounting year ends on 30 September.
During the 2023/24 transitional period his tax will be calculated as follows:

Year to 30 September 2023: £50,000
Transition period: 1 October 2023 to 5 April 2024 (portion of profits from year to 30 September 2024) £25,000

Total profits assessed, subject to overlap relief = £75,000
Additional tax due can be spread over five years.

Tax experts have pointed out to the government that this change could have an adverse impact on a taxpayer’s entitlement to the personal allowance, pension annual allowance, the HICBC and student loan repayments. We have yet to hear the government’s response to these challenges and will update readers accordingly when further details are available.

A further negative impact to be felt by business owners affected by this change will come in the form of increased administrative costs. Businesses will need to become familiar with the new rules and the changes to accounting periods, plus potentially update their accounting software.

If you have questions about the transition and would like some support from our accounting team, contact partners@rjp.co.uk.