New Accounting Basis Periods for tax assessment

[Eric Mc]

EVERYBODY who operates a business through a sole tradership (self employment), a normal partnership or a limited liability partnership (LLP) needs to be aware that from 5 April 2024, you will need to prepare accounts for tax purposes up to 5 April each year (no matter what year end you previously may have used for your business accounts).

The only exception will be for those who currently prepare their annual accounts to 31 March.

Anybody who prepares accounts to any other year end date will need to make a massive change to their accounts systems during the transition phase. There will be complicated averaging of profits arrangements during the transition year and there will also be provisions for "overlap relief" where some profits end up falling into two tax years (this is similar to what happened when Self Assessment tax returns were introduced 26 years ago).

From 6 April 2024 all unincorporated businesses need to report their income and expenses to HMRC as they arise in the tax year (the tax year basis). This has been legislated for by Finance Act 2022, Schedule 1 which abolishes all basis periods for income tax (new ITTOIA 2005, ss 7A-7D).

All sole traders, partnerships and limited liability partnerships (LLPs) will have to use the tax year basis from 2024/25, which coincides with sole traders being mandated into Making Tax Digital for Income Tax Self Assessment (MTD ITSA). However general partnerships won’t enter the MTD ITSA regime until April 2025, and there is no published start date for LLPs to commence MTD ITSA reporting.

Those businesses that already draw up accounts to 5 April will see no difference to their tax reporting. Businesses that have a 31 March year end also won’t be greatly affected, as accounting periods that end on any of: 31 March, 1, 2, 3, or 4 April will be treated as ending on 5 April. Any income and expenses in those last few d

[Ham_and_Jam]

Whilst I appreciate there are also more complex examples, won’t the majority of businesses just need to force a year end on 5 April in advance of this new reporting requirement.

We did this a few years ago to align the years end with our other business. We didn’t experience any issues, and it was very straight forward.

[Eric Mc]

Ham_and_Jam said:

Whilst I appreciate there are also more complex examples, won’t the majority of businesses just need to force a year end on 5 April in advance of this new reporting requirement.

We did this a few years ago to align the years end with our other business. We didn’t experience any issues, and it was very straight forward.

When you say "we" are you referring to a sole trader/partnership business or a limited company?

[Ham_and_Jam]

Partnership

[Eric Mc]

What was the original financial year end before it was changed?

[Ham_and_Jam]

Eric Mc said:

What was the original financial year end before it was changed?

I couldn’t tell you now, it was several years ago. I have a feeling it may have originally been a calendar year but can’t be certain.

Just remember changing the year end, and it being fairly straightforward.

[Eric Mc]

How did you ensure that some of the business profits didn’t get taxed twice?

[Ham_and_Jam]

Eric Mc said:

How did you ensure that some of the business profits didn’t get taxed twice?

I’m not sure why our profits would be taxed twice with a clear linear year end?

Maybe our business is simple enough for it to be straight forward, or maybe our accountants did the hard lifting.

Regardless, from our perspective it didn’t create any issues.

[Eric Mc]

Ham_and_Jam said:

I’m not sure why our profits would be taxed twice with a clear linear year end?

Maybe our business is simple enough for it to be straight forward, or maybe our accountants did the hard lifting.

Regardless, from our perspective it didn’t create any issues.

It's to do with the "basis period" that has been traditionally used for taxing the profits of sole traders and partnerships.

If you had a business year end of (say) 31 December, your profits for the financial year end 31 December 2015 would have been taxed in tax year 2015/16.

If you changed your business year to 5 April 2016, then the profits would be taxed in tax year 2015/16
based on the profits for the YEAR ended 31 December 2015 PLUS the 96 days from 1 January 2016 up to 5 April 2016. So more profits will be taxed in 2015/16 than if you hadn't changed the year end.
As you can see, the profits being taxed in the transition year are for a period longer than a year. The excess profits being taxed are known as "overlap profits".

The "overlap effect" is worse if a business has a financial year end earlier in the calendar year, for instance, a year end of 31 May or 30 June will generate even larger overlap profits.
I am sure there will be some sort of "overlap relief" built into the new rules but we don't know for sure how such relief will be given.

That's what was done when we had the last change to "basis periods" over 20 years ago. "Overlap Relief" was given in two circumstances back then, when the business changed its year end again or when it closed down. The "change the year end" option will not be available under these new changes as you will not be allowed change your year end ever again. Your year end will be mandated by the UK government (something I strongly disagree with). Of course, going out of business will probably trigger overlap relief but that will not be a popular choice.
The tax for tax year 2016/17 would be based on the year from 6 April 2016 to 5 April 2017.

There are still some businesses around who never made use of the overlap relief they were entitled to from tax years 1995/96 and 1996/97 and many will have forgotten they ever had such relief by now.