HMRC basis reform period for sole traders, partnerships and unincorporated businesses

Carly Woodland Manager

Pinkham Blair Conversational Accountants Herts Beds Bucks London

These changes were announced by the Government in the Autumn budget 2021 and were legislated in Finance Act 2022.

For example, if a business has an accounting date of 30th September 2022 the profits for that year will all be included in the 2022/23 tax year. This method of taxing the profits is called the ‘current year basis’.

There are specific rules which can also determine the basis period. For example, in the early years of trading there can be overlapping basis periods which mean profits are taxed twice. This creates overlap relief which is given when a business ceases to trade.

The change HMRC is planning to implement is called the ‘tax year basis’. This will affect unincorporated businesses which prepare their year end accounts to any date that is not 31st March or 5th April. It will mean that business profits are taxed based on the profit made within each tax year regardless of their accounting date. This will remove the overlapping profits some businesses incur as mentioned above, as this will not be able to happen going forward. Overlap profits are sometimes lost by the time the business ceases to trade so this will not be an issue in future. All overlap profits in existence in the 2023/24 tax year will be relieved in full in that tax year. This is so they are utilised and not carried forward to when the new basis begins on 6th April 2024.

The aim of this is to simplify the way unincorporated businesses are taxed and to create a fairer way to allocate trading income to each tax year. It has also been created to align with the way other types of income are taxed for individuals. Property income, interest and dividends are already taxed on a tax year basis so introducing this method for unincorporated businesses profits means that individuals income is all being taxed in a consistent method.

This will also accelerate some individuals’ tax liabilities as they will have to start paying income tax earlier. For example, under the current method used ‘the ‘current year basis’ two businesses with very different accounting year ends – one with a year end of 30th April 2022 and one with a year-end of 5th April 2023 both have any accounting year end within the 2022/23 tax year and will pay their balancing payments for tax on 31st January 2024.

The initial response to this planned change has mainly been that it is going to create a higher administrative burden to many unincorporated businesses and their accountants. HMRC have responded to this by saying that businesses can apportion profits by months so that the calculations can be simplified. For example, a business with a year-end of 30th September 2023 would currently include the whole profits of this accounting year in the 2023/24 tax year. From 2024/25 under the tax year basis, they would report the 12 months to 31st March 2025 so would apportion this as follows:

  • 6/12 of the profits of the accounting year ended 30th September 2024, PLUS
  • 6/12 of the profits from the accounting year ended 30th September 2025

The 2023/24 tax year is going to be a transitional tax year where the profits will be taxed on the current year basis as usual and then the tax year basis is also being introduced. The profits between the end of the accounting date and the tax year end will also being included. Taxpayers can opt to spread this increased profit over a period of up to five years or can also opt for the whole amount to be taxed in this tax year.

Overall, the changes will create an administrative burden and potentially higher tax charges initially. Once the new system is in place it will be more in line with the other type of income individuals are taxed on.

We’re all ears

Tell us how your organisation operates and we will use innovative thinking to make your business better.