Posted by jonathanfullarton - January 5, 2024 8:29 am Preparing for the new tax year basis for sole traders and partnerships

The way that profits are assessed is changing. This will affect all sole traders and partners who do not currently have an accounting year end date of 31 March or 5 April.

From next year (2024/25), businesses will be taxed on profits for the tax year instead of being taxed on the profits for the accounting year that ends within a tax year.

The year 2023/24 is a “transition year”. Businesses will need to declare the total profits from the end of the last accounting date in 2022/23 up to 5 April 2024. This means that profits generated over a longer period will be taxable in the transition year.

For example, if a business currently prepares accounts for the year ended 31 December, the liability for 2023/24 will be based on the profits for the 15 months ended 5 April 2024.

Businesses will be able to use any available overlap relief against the additional profits. Overlap relief is based on profits when the business first started (or in 1996/97 if later).

Overall, this is likely to result in an increase in the tax liability for 2023/24. Transitional relief will be available which will allow the increased tax arising from the change of basis to be spread over five years.

Many business will decide to change their annual accounting year end date to 31 March or 5 April to tie in with the tax year. If a different accounting year end date continues to be used, it will be necessary to pro-rata profits from two accounting periods. 

For example, if a business continues to prepare accounts for the year ended 31 December, for 2024/25, it will be necessary to pro rata profits (so 9/12th of profits for year ended 31 December 2024 and 3/12th of profits for year ended 31 December 2025).  If accounts for the later period are not complete by the tax return filing date, estimates will need to be included in the self-assessment tax return.  An amended tax return will then be required when the accounts are finalised.

Should you require any further advice then please contact your local MFW office where our teams will be pleased to help.