Preparing for the New Tax Year Basis
Posted on 6th February 2023 by Joanne Stoneman
The rules HMRC use to work out sole traders’ and partners’ profits for Income Tax in a Self-Assessment return are changing for many businesses from the tax year 2023 to 2024 onwards.
Preparing for the new tax year basis — Income Tax Self-Assessment
The rules HMRC use to work out sole traders’ and partners’ profits for Income Tax in a Self-Assessment return are changing for many businesses from the tax year 2023 to 2024 onwards. This may affect the return that they must submit by 31 January 2025. It will also affect subsequent returns.
This change is not affected by the delay to the introduction of Making Tax Digital for Income Tax Self-Assessment announced on 19 December 2022.
Only taxpayers with an accounting date other than 31 March or 5 April are affected by this reform.
Under the new rules, from 6 April 2024, businesses will be taxed on profits for the tax year and not, as now, the profits for the accounting year ending in a tax year.
For tax year 2024 to 2025 and future years where accounting years are different from the tax year end, the taxable profits will be worked out by apportioning the profits for the 2 accounting periods that straddle the tax year.
The tax year 2023 to 2024 is a ‘transition year’ in which self-employed businesses will move to the new way of calculating taxable profits for the tax year.
Businesses will need to declare the total profits from the end of the last accounting date in tax year 2022 to 2023 up to 5 April 2024. This means that profits generated over a longer period will be taxable in the transition year.
In the tax year 2023 to 2024, businesses can use any overlap relief resulting from overlap profit when the business first started. By default, any remaining additional profit can be spread over 5 years.
As an example, if a business’s accounting date is 31 December 2023, they must declare profits from 1 January 2023 to 5 April 2024 (15 months rather than 12 months) in their tax return for the tax year 2023 to 2024, which is due by 31 January 2025.
The transition year 2023 to 2024 will present an opportunity for all businesses currently trading, regardless of accounting date, to use any overlap relief due.
From tax year 2023 to 2024 onwards, some businesses might have to use provisional figures on their returns. The government will relax its guidance to give businesses the normal amendment time limits to submit their final figures if they have submitted provisional figures as part of their tax return.
Where a business’s accounting date is changed in tax year 2022 to 2023, the current change of accounting date rules will apply. Where a business decides to change its accounting date from 2023 to 2024 onwards, these rules will not apply, and a change can be made regardless of past changes.
For businesses changing accounting date in the 2021 to 2022 tax year, HMRC will be able to provide details of overlap relief figures, or historic profit figures, on request, these figures are recorded in HMRC systems.
Taxpayers looking to change accounting dates and use overlap relief in tax years 2022 to 2023, or 2023 2024 should wait until further information on the provision of overlap relief figures for these tax years is announced.