Change of basis period: new rules for income tax

Currently, all business profits subject to income tax are taxed in the tax year the business accounting year ends (the current year basis). The rules will however change from 5 April 2024, when the business profits of sole traders, partnerships, and trusts, will be taxed in the year they arise – regardless of the accounting year-end date (the tax year basis).

The tax year 2023/24 is serving as a transitional year and has introduced significant changes in preparation for the new basis to be operational from 5 April 2024. During the tax year to 5 April 2024, businesses with an accounting year-end date not concurrent with the tax year are required to calculate their transitional profits and apply the transitional rules, briefly set out below.

The basis period for the 2023/24 tax year began immediately after the end of the basis period for the 2022/23 tax year and ends on 5 April 2024.

For the purpose of the various calculations to be considered, this basis period will be in two parts:

• the standard part being the first 12 months i.e. the normal period
• the transition part being from the end of the standard part to 5 April 2024

Existing overlap profits will be deducted from the profits of the transition part, giving the transitional profits.

To ease the tax burden of these changes, the transitional profits will be spread evenly over 5 years from the current tax year 2023/24. If the business ceases permanently during this 5 year period the balance of the amount of the transitional profits are taxed fully in the tax year the business ceases.

During this 5 year period the business owner can accelerate the charge by electing for any additional amount of the transitional profits to be taxed in a selected tax year.

If the deduction of the overlap profits creates or increases a trading loss, the resulting loss/
additional loss can be treated as a terminal loss and set against profits of the same trade for the previous 3 tax years.

To ensure the tax payers allowances and other means tested benefits are not impacted by these transitional rules, the calculation of the income tax liability treats the transitional profits as a separate component of income.

The transitional profits are also ignored in averaging of profits calculations for farmers and creative artists.

Businesses with a year-end between 31 March and 5 April will be treated the same as 5 April unless an election is made otherwise.

Act before 5 April 2024

Many business owners will see more profits taxed in the 2023/24 tax year than would otherwise be the case. This will not only bring forward the tax payment date for these profits, but also has the potential of pushing individuals into higher rates of tax.

Going forward, as all business profits will be taxed on a tax year basis, tax payers will have only a short period to finalise the business accounts and report the profits to HMRC, which will be a substantial change for businesses who have an accounting year-end not concurrent with the tax year.

We advise all business owners to fully understand the practical implications of these changes as well as the cash-flow impact of an increase in personal tax liability for the 2023/24 tax year.

We expect some businesses have changed their accounting year-end date to 31 March 2024 to simplify the transitional calculations and the reporting of the annual profits going forward. Not all businesses will have been able to do this, and will need to consider the submission of provisional tax returns until final accounts are prepared for the business.