Basis Period Reform for Sole Trader Businesses
The immediate threat of MTD has been kicked down the line to 2026, but the accompanying piece of legislation on Basis Period Reform has not.
If your TRADING year is the same as the TAX year, then there is no change.
If your TRADING year end is not the same as the TAX year end, then you will have paid excess tax on the overlap period when you started your business but since then, will have paid tax on profits based on your trading year. This is changing NOW so that profits earned in the 2023/24 tax year will be taxed in the tax year. For this transition year, you will be taxed on the profits from BOTH your standard trading year (i.e., the year end that falls in the 2023/24 tax year) AND the remaining months from the date of your trading year end up to April 5th, 2024.
You can choose to extend your trading year to line up with the tax year (April 5th, but March 31st is considered the same for business). However, there may be good commercial reasons to keep your existing year end. Either way, you will pay more tax on profits in the 2023/24 tax year. It may also cost you more in accounting fees as you will need accounts prepared for the trading year and an estimate of tax due on profits between your year end and 5th April 2024.
If you have overlap relief from your first year of trading, you can bring that forward to offset some or all of this.
Example of Tax Implications of Basis Period Reform
Profits – trading year ending 30 September 2023 (12 months) – £100,000
Profits – 1 October 2023 to 31 March 2024 (6 months) – £50,000
Total:
£150,000
Less: overlap profits brought forward
(£20,000)
Taxable profits:
£130,000
Under the current rules, the taxable profits for the 2023/24 tax year would be £100,000 but the changes see taxable profits of £130,000.
HMRC is kind enough to realise that this has a significant impact on cash flow and has therefore allowed that in the transition year (trading periods ending between 6th April 2023 and 5th April 2024), the excess profits can be spread across five tax years.
In our example, the excess profit of £30,000 = additional tax of £6,000 that can be spread over the five years from 2023/24 to 2027/28.
Find out more about Basis period reform
Not clear on what this means for you? Please get in touch.
