Date posted: 11th Dec 2023
As you may be aware, HMRC are changing the rules in respect of how sole traders and partnerships report profit from a tax perspective.
This change will impact all sole traders, partnerships and LLP’s with an accounting period that does not end on 31 March or 5 April. It will not impact companies.
For those businesses with a different year end, especially unrepresented taxpayers, they may not be aware of the impact of the changes. Going forward, those businesses will be required to report profits earned in a tax year, rather than the accounting year.
The changes are best illustrated with an example.
Example
Bob is a sole trader and prepares his accounts to 31 December each year. He has traded since 1 January 2000 when he began self employment and for the last few years, his profits have been declared on the tax return for the tax year in which the accounting period ends i.e.
Tax Return |
Accounts to |
| 2020/21 | 31 December 2020 |
| 2021/22 | 31 December 2021 |
| 2022/23 | 31 December 2022 |
However, for the tax return for the year to 5 April 2024 (i.e. 2023/24), Bob will need to report the profits from the year to 31 December 2023 (as normal) plus the profits for the period 1 January 2024 to 31 March 2024.
Thereafter, Bob will report profits in line with the tax year – so his 2024/25 tax return (year to 5 April 2025), will report the profits from 1 April 2024 to 31 March 2025. This will be the case even if Bob retains a calendar year for preparing accounts….
These changes could have a number of impacts on Bob. He is potentially paying tax on 15 months of profits rather than 12, so has a possible cashflow disadvantage and the extra 3 months, may push Bob into a different tax band (e.g. from basic rate to higher rate). In 2023/24, Bob may be able to utilise any “overlap relief” that he may have incurred on starting the business in the 2000/01 tax year. If he has overlap relief, this would bring down the profits subject to tax in 2023/24 and any excess could potentially be spread over the following tax years. However, the position would depend upon Bob’s personal circumstances.
Bob needs to be prepared in advance for these changes and take professional advice to ascertain what his position may be.
If there are any queries, on basis period reform, please give us a call.
