In preparation for the implementation of Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) in 2026, a basis period reform is being introduced to place all sole traders and partnerships on a uniform March year-end.
Historically, sole traders and partnerships used a non-March year-end as it delayed the tax due dates at the start of the business. As an example, a sole trader with an accounting year-end of 30 April 2022 would not need to pay tax until 31 January 2024, the same date as if the business had a 31 March 2023 year-end.
It has been deemed that 2023/24 will be a “transition year” where all self-employed and partnership businesses will conform to a 31 March 2024 year-end for that year and every year going forward.
In this transition year, businesses with a non-March year-end will have a long period to declare and be assessed on in 2023/24. This will include their normal 12-month period to their accounts year-end, plus however many months from the end of that period to 31 March 2024, meaning up to 23 months of profits could be taxed in 2023/24.
To alleviate the acceleration of tax due for this long period, anyone affected by this reform must use any overlap profits they have available to reduce the profits of the extended period. Overlap profits are created when the business first started or when it changed to a non-March year-end.
Moreover, it will be possible to spread the profits arising (equally) in the transitional period over the course of up to 5 years. These are known as “transitional profits”. It can be possible to elect to have a larger portion of these transitional profits taxed in advance in any of the five years, but the assessable amount cannot be reduced below an equal amount of the total remaining amount chargeable divided by the number of remaining years.
For example, in the tax year ended 5 April 2024, a business with a year ended 30 April 2023 will be taxable on its normal accounting year end 30 April 2023, plus the 11 months to 31 March 2024. This means that a total of 23 months will be brought into account for one tax year, but the excess can be spread equally across 5 years.
The impact of these changes will vary from business to business depending on how many additional months that will be brought into account and the overlap profits available.
As a result of these changes, we recommend that most businesses conform to a 31 March year-end to avoid having to apportion profits each year, as the usual benefit of having a different year-end – additional time to pay tax – will no longer exist.
If these changes will affect you and your business, and you would like advice on the above, please feel free to get in touch.