The UK is currently undergoing a transition period for the basis period reform, which will be fully effective from the 2024/25 tax year. The reform affects unincorporated businesses, such as self-employed sole traders, and requires them to prepare for upcoming changes.
Current Rules for Unincorporated Businesses
Under the current rules, unincorporated businesses are taxed on profits within their accounting period in a particular tax year. The accounting period can start from any date within the tax year, which means business owners can choose their accounting date. However, in the first few years of trading, the accounting period is affected by specific regulations that could generate overlapping basis periods leading to double taxation on profits.
What is Changing in 2024/25?
Starting from 6 April 2024, the basis period for all unincorporated businesses will move to the end of the tax year. This change will impact all businesses whose year-end falls outside the range of 31 March and 5 April, requiring them to prepare for the shift.
Impact of the Basis Period Reform on Your Business
Businesses with a year-end between 31 March and 5 April could face a substantial tax bill due to taxes on up to 23 months of profits from the 2023/24 tax year of profits within one year. Additionally, businesses may need to use provisional figures in tax returns if they haven’t prepared their accounts and tax computations before the deadline.
The change in tax year-end could also result in businesses moving into a higher tax band, and they may not benefit from certain annual reliefs and allowances, such as child benefits. Furthermore, there may be cash flow implications due to a shorter period between profit generation and tax payment.
Support for Unincorporated Businesses
HMRC is exploring ways to mitigate the impact of the changes, such as allowing businesses to distribute additional profits over five years or offering extended payment schedules. Businesses can use any accumulated overlap relief during the transition year (2023/24), which means that they will only be liable for 12 months’ profits, though the relief may be based on less profitable years. After the transition period ends, overlapping relief will be abolished.
Preparing for the Basis Period Reform
Preparing for this reform requires careful tax planning. Business owners should consider bringing forward their year-end into the previous tax year through their 2022/23 tax return if their profits are small. By doing this, they can align their year-end with the new set year-end and avoid significant penalties caused by the change in rules.
To ensure that your business is ready for the changes, it’s important to seek professional advice from an experienced tax accountant. We can help you understand the changes, how they’ll impact your business, and what steps you need to take to prepare. Get in touch with us at firstname.lastname@example.org