Keep on top of the changes to income tax reporting

Are you a sole trader or part of a partnership? Get ready to navigate the changing landscape of income tax with the basis period reform. JOSHUA RUTHVEN, from our accounts and audit team, unravels the complexities of this change and provides you with invaluable insights to stay ahead of the game.

The government announced in the Autumn 2021 budget that basis periods for income tax purposes would be abolished and replaced with a tax-year basis. This will mean that profits subject to tax will be apportioned to the tax year instead of twelve months' worth of profit up to the accounting date in the tax year.

The basis period reform will start from the 6^{th of} April 2024 and means sole traders and individual partners will have a basis period which is in line with the tax year.

Unincorporated businesses who already have a year end which is aligned to the tax year will not be affected by the changes. Traders who have a year end for the period 31 March to 4 April will be treated as being already aligned to the tax year. The idea for the reform is that it will simplify the taxation of trading profits for when Making Tax Digital for Income Tax is implemented by HMRC.

Transitional rules in 2023/24

For traders whose accounting periods are not aligned to the tax year, their profits in 2023/24 will be calculated based on their profits from the end of the 2022/23 basis period to 5 April 2024, with a deduction being allowed for any unrelieved overlap profits. For example, if a sole trader had a 31 December 2023 year end, they would be taxed on the full calendar year for 2023 plus an additional 96/366ths of the 2024 calendar year. The 2023 period will be considered as the standard part and the part taxed in 2024 will be the transitional element. The profits arising from the transitional period will can be spread across five tax years after deducting the unrelieved overlap profits. Traders also can apply to HMRC to have the transitional profits taxed in one year instead of being spread across five.

Example

For example, a sole trader draws their accounts to 31 December. The profits are as follows:

• Year to 31 December 2023: £50,000
• Year to 31 December 2024: £60,000
• Overlap profits brought forward: £5,500.

The sole trader's transition period will run from 1 January to 5 April 2024. The transition profits are calculated as follows:

The profits will be taxed on the 2023/24 self-assessment tax return.

An alternative option

As an alternative, sole traders can keep their year-end as it was before. This will mean, however, that the trader has to continuously apportion their profits from two accounting periods across the tax year.

If you need help or advice with the basis period reform and the transitional rules, please feel free to give the tax department a call on 0115 955 5500.