Changes to the basis period for the UK’s tax year, which could see many businesses forced to move their accounting year end, will go ahead despite continuing concerns over increased complexity for more than half a million sole traders and partners. The changes, which will follow a transition period in 2023, are set to come into force for the 2024/25 tax year.
Following the December 2022 announcement that the mandatory introduction of Making Tax Digital for income tax self-assessment for the self-employed would be delayed until 2026, advisers had hoped for a similar delay to the change in the tax year basis for reporting taxable profit. However, HMRC has now confirmed the move will go ahead as planned, saying the transition period will give businesses the time to adjust to the new reporting requirements and deadlines.
‘A lot of people will be faced with a period of uncertainty if they do not change their year end’
Implications
Under the new rules, from April 2024 sole traders and partnerships will be taxed on profits earned in the tax year and not, as is currently the case, on the profits for the accounting year that ends within a tax year. This means that businesses taxed through income tax self-assessment (typically sole traders and partnerships) will need to change their accounting year end to match the tax year end (either 31 March or 5 April) or use provisional figures on their returns.
Businesses that stick with their non-tax year accounting periods will have to apportion profits or losses across accounting periods for the tax year basis. For any periods where accounts are not yet finalised but tax returns have to be filed, this apportionment will require estimated figures followed by any necessary amendments. This may increase the administrative burden on the taxpayer, as well as the levels of tax uncertainty.
‘It will be the seasonal businesses that feel the pinch’
‘A large number of businesses will have chosen their year end for reasons other than aligning with the tax year, such as those in hospitality or farmers,’ says Glenn Collins, ACCA’s head of technical and strategic engagement. ‘A lot of people will be faced with a period of uncertainty if they do not change their year end. It is definitely not a simplification and could lead to increased compliance costs.’
Melanie Proffitt, CFO of Farncombe Estate, agrees. ‘It will be the seasonal businesses that will feel the pinch,’ she says. ‘This could overlay extra administration for these businesses.’
An HRMC spokesperson told AB: ‘Basis period reform is an important simplification, replacing the existing complex and confusing basis period rules with a single, consistent, fairer tax year basis. The timeline for basis period reform will not be affected by the delay to Making Tax Digital, as it will give businesses more time to get used to the tax year basis before the changes.’
Counting the costs
There are an estimated 528,000 sole traders and partners with non-tax year basis periods. For these businesses, one-off costs could include familiarisation with the changes, and updating software and guidance. There could also be one-off costs incurred by businesses that move their accounting date to 31 March or 5 April.
Ongoing costs could include the administrative burden of estimating profit figures for a small proportion (4% of sole traders and 17% of partners, according to HMRC estimates), and of submitting amended returns to provide final figures after the filing deadline. HMRC estimates this will affect approximately 278,000 sole traders and partners, although it also expects many businesses to change their accounting date when the measure is introduced, so that figure will fall.
Businesses that prepare accounts to a date later in the tax year will be particularly impacted
Later reporters
KPMG says businesses that prepare accounts to a date later in the tax year will be particularly impacted by the new rules. For example, businesses with a 31 December year end currently have 13 months to finalise their figures. Going forward, they will have one month. For example in 2024/25, where the filing deadline is 31 January 2026, they will be assessed on nine months from the year ended 31 December 2024, and three months from the year ended 31 December 2025.
The results for the latter period may not even be known by the 31 January 2026 filing deadline. ‘Large partnerships, even those with an accounting date earlier in the year, may find the shorter timeframes a challenge, especially if a statutory audit is required,’ KPMG says.
Overlap profits
The move will also phase out ‘overlap profits’, as all profits will be taxed on a tax year basis. Overlap profits occur in the first period of starting a sole trader business or becoming a partner in a partnership, or possibly on a change of accounting period.
HMRC says the transition year 2023/2024 presents an opportunity for businesses currently trading, regardless of accounting date, to use any overlap relief resulting from overlap profit from when the business first started. By default, any remaining profit can be spread over five years.
‘You will need really good records, as you will want to know where your business stands’
However, HMRC has conceded that some businesses and individuals may not hold accurate records of overlap profit, either because accurate records have not been kept or because it was generated a long time ago. ‘You will need really good records, as you will want to know where your business stands,’ Collins says.
In response, HMRC is developing an online form for requesting overlap relief requests and an internal tool to simplify collection of overlap relief information. It is also training more officers to deal with overlap relief queries and undertaking ‘a programme of engagement to enhance awareness of basis period reform, with a focus on unrepresented taxpayers’.
