Basis period changes could see higher taxes for some businesses, ATT warns

From April 2024, sole traders and partnerships must pay income tax on the profits made in the tax year, rather than the profits from their accounting period ending in the tax year.¹

The 2023/24 tax year starting today is a “transitional year”, with special rules to calculate taxable profits and therefore the tax payable. These mean that businesses with an accounting period ending other than on 31 March or 5 April will be taxed both under the previous rules – to the end of their accounting period – plus an extra amount of profits to bring them up to the end of the tax year.

For example, a sole trader or partner with a 31 December 2023 year end will be taxed on both:

• profits for the year ended 31 December 2023, and

• profits for the period from 1 January 2024 to 5 April 2024.

The resulting increase in taxable profits can be reduced by deducting any ‘overlap profits’ which were taxed twice in their early years of trade and may also be able to spread any remaining extra profits over up to five years.

The ATT has urged businesses that may be affected to consider their tax liabilities in the coming years, and whether aligning their accounting year with the end of the tax year could make things simpler for them in the future.

Jon Stride, Vice Chair of the ATT Technical Steering Group said:

“The transitional year rules could see a temporary increase in the tax payable by businesses without a 31 March or 5 April year-end.  However, that is not the end of the story, because these businesses could also experience ongoing additional administrative burdens unless they change their year-end going forwards.

“If they don’t change their accounting date, they will have extra work to do each time they complete a tax return, because they will need to combine the amounts from two separate sets of accounts. What’s more, depending on how late the accounting date falls, the second set of accounts may not even be ready by the time the tax return is due and profits will need to be estimated.

“To avoid these ongoing administrative burdens businesses can change their accounting date to 31 March or 5 April. This can be done by drawing up a set of accounts for a longer or shorter period than usual, ending with the new accounting date.”

While changing their accounting date would make tax less complicated for many businesses, doing so may not be the best choice for all.

Jon Stride said:

“Changing your accounting date to 31 March or 5 April will undoubtedly make your life easier from a tax perspective. However, depending on your industry and particular business, it might not be the right answer. For example, a 31 March or 5 April year-end may not be convenient for seasonal businesses, or those who have a busy spring or summer season such as farmers and the hospitality industry.

“While it will greatly reduce ongoing administrative burdens, moving accounting dates will not help you to escape any temporary increase in tax as a result in the change of the basis period rules.

“Before making any change, you need to weigh up what’s best for your business overall alongside the tax issues. For more help, speak to an accountant or tax adviser.”

Notes for editors:

1. For example, under the previous rules, businesses that drew their accounts up to 31 December each year would be taxed on profits for the year ended 31 December 2022 in the tax year ending 5 April 2023.