So, the end of another tax year has passed and with that a new tax year starts.
Whilst some of the focus will be on collating your tax return information to enable you or your advisors to prepare your tax return for the year ended 5 April 2023, consideration also needs to be given to the change of basis if you run your own business or are in a partnership, if this has not already been done.
Basically, from 6 April 2024 profits of sole traders or partnerships will be calculated using the period 6 April 2024 to 5 April 2025, regardless of your business year end.
The current tax year, being 6 April 2023 to 5 April 2024 is what is known as the “transitional year” because it is the year when businesses “transition” from the current basis to the new basis. The rules can be quite complex but in essence the transitional year is effectively made up of two periods:-
- The standard part – being the “normal basis period” – so this will be for the 12 months to the existing year end
- The transitional part – running from the end of the above period to 5 April 2024.
Unless you have a 5 April year end, or have changed your year end already to 5 April, you will probably end up being taxed on more than 12 months profits in this transitional year. Pragmatically, HMRC are treating a 31 March year end as if it fits with the tax year, so no amendment is required in this case.
Therefore, you are allowed to:-
- Deduct any overlap profit, where available, from the transitional profit and
- Spread any excess over a period of up to 5 years. This is to help assist cashflow.
How you choose to have the additional profits taxed can be quite flexible. For example, if you were to spread the profits in year one, you can always change your mind and bring more of the profits that have been spread into charge in a particular year if it is beneficial for you to do so. This might be for example where your business has traded at a loss, or you have created losses which can be set against your taxable income for a year.
HMRC have confirmed that any profits that have been spread will not be taken into account for the purposes of calculating the high-income benefit charge, but they will be for the purposes of calculating the restriction on the personal allowance where income is above £100,000.
Hopefully most businesses that do not have a 5 April year end will have already discussed this with their advisor, and this is something which we have been actively doing over the last 12 months, if not longer.
However if you file your tax return yourself you may need some advice as to how to deal with this and how the change will impact on you.
Whilst making tax digital has been delayed until April 2026, the change in basis period has not and should be at the very forefront of your mind.
If you wish to discuss the above further and assess the impact of the changes on your personal position, please do not hesitate to get in touch.