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The
basis period rules for unincorporated businesses are being changed from the 6 April 2024, with a transitional year of the 2023/24 tax year.
The new rules will not change the accounting period of the business (although you may wish to consider this), however the tax position will move from a current year basis to a tax year basis. This will mean that business profits will be calculated for the tax year rather than for the period of account ending in the tax year.
While this blog will highlight the changes occurring in the 2023/24 transitional year, if you would like to see how the basis period reform will affect your business cash flow from the 6 April 2024 onwards, please read our blog
here.
Who is going to be affected?
Unincorporated businesses that prepare accounts to a date other than one between 31 March and 5 April inclusive, as well as any in the list below that commence trading from 6 April 2024:
- Self-employed individuals
- Partners in partnerships
- Other unincorporated entities with trading income (such as trading trusts, estates and non-resident companies)
During the transitional year
The 2023/24 tax year will act as an alignment year for many businesses that do not date their accounts to 31 March or 5 April. This re-alignment of tax years will incur an advancement of tax liabilities for these businesses. Any effected business will need to recognise two profit parts, for tax purposes:
- The ‘standard part’ – Which is the profit in the 12 month period beginning at the start of the basis period and ending in the transitional year. E.g. For a business with a year ending 30 April, this would be any profits arising in the 12-month period ended 30 April 2023.
- The ‘transitional part’ – Which is the profits in respect of the period beginning immediately after the end of the basis period and ending on 5 April 2024. E.g. using the same example above, this would be any profits arising in the period from 1 May 2023 to 5 April 2024.
This will result in businesses recognising nearly two years worth of profits in one tax year, in some cases, which can lead to increased tax bills and potential
cash flow issues.
These changes should not affect the taxpayer’s income level that is used to calculate certain entitlements to reliefs and benefits. However, in some cases, the new rules could raise some taxpayers into a higher income tax band.
The transitional profit will also create a stand-alone tax charge that will be at a different step of the individual’s tax calculation for the year (and for every year when spreading). This means that it may be possible to claim double
tax relief and that an individual can claim income tax relief on certain investments.
If you need assistance with your income tax and tax relief options, please ask a Moore adviser.
Spreading the transition profits
To ease the potential tax implications of the transitional year, it is possible to utilise any overlap profits the business may have to offset against the transitional year profits. In addition, the transitional profit will automatically be spread over five tax years, starting with the year ended 5 April 2024.
Where a business ceases to trade before the start of the fifth year (before 6 April 2028), any balance of transitional profits will be treated as arising in the year of cessation.
It is possible to make an election to accelerate part or all of the transitional profit in order to tax the profits in the most efficient way.
Transitional year losses
If a loss is received in the transitional year, the taxpayer can treat the business as
ceasing on 5 April 2024 for the purposes of the
terminal loss relief rules. This means that this loss can be carried back for up to three tax years, rather than the standard 12 months, to offset against profits taxed in those years.
Other factors
- Consider any immediate cash flow implications and manage the effect of these changes
- Consider changing accounting date to 31 March to make the calculation of assessable profits from 2024/25 clearer.
- Large partnerships should evaluate the processes which need to be in place to file provisional and then final tax returns for each accounting period. This is mainly applicable to partnerships who may not be in a position to change their accounting date. It is possible that some businesses will want to consider the pros and cons of a move to a corporate structure in due course.
- It is possible to request a one-year deferral, but only do this if you are able to capitalise on the extra time provided. For example, if you anticipate your profits to reduce.
There are a number of other areas of preparation and questions that arise on the transition to the new rules. To ensure you are ready for the transition, please
contact us.