Tax Year Basis Update

A basis period is the period that HMRC tax your income/profits for. Individuals, trusts, and partnerships with trading income, are subject to the basis period rules. Including other unincorporated entities with trading income which is chargeable to income tax.

Often the basis period will be the same as the tax year. However, where the accounting period end is not a date between 31 March and 5 April, the basis period will be a different date. This is known as the current year basis. From 6 April 2024 (after Budget policy paper announcement), all taxpayers will be switched to the tax year basis.

HMRC has said that it’s vital to MTD that there is a change to the tax year basis. Without it an estimation of the tax owed by the business could not be provided for the year.

How will it work?

The current year basis was due to be changed in 2023/24 to align with the start of MTD ITSA. However, this was delayed for another year to 2024/25. The change will affect unincorporated businesses. They may find their taxable income is increased. This will affect them if they don’t already do their accounts to a date between 31 March and 5 April.

Transitional Issues

Firstly, the transitional period for the tax year basis will be 2023/2024. Double taxation could occur for some businesses during the transitional period. This is because they will potentially be taxed on more than 12 months of profits.

Overlap profits will be available to offset against profits during the transitional year in some cases. For example, If the business has overlap relief from when the business started or changed accounting period.

However, HMRC have said that taxpayers will have the option to spread the additional profit from the transitional year. They can do this over a five-year period.

There may be some additional issues caused by the additional taxable profits. For example, the impact on personal allowances or the higher income child benefit charge. We understand that the government are going to address these unintended consequences in the draft legislation.

Ongoing Issues

HMRC estimate that 278,000 businesses will have to use estimated figures on an ongoing basis for their finalisation statement. Businesses will potentially have to apportion profits from two accounting periods. This is if they don’t align their accounting period with the tax year end.

Tax Year Basis Help

Here at Jack Ross, we have a team of experts who can help you. If you have any questions about how this change may affect you, complete the form below. Your usual contact will be happy to help if you are already an existing client. If you are not yet a client, we can arrange a free consultation to bring you onboard. At this point we can look at your current standing and decide the best way to proceed.