15 March 2023

do you run an unincorporated business?

Read on to find out more about the new taxation rules that’ll apply from 6 April 2023…

What’s the current situation?

Right now, unincorporated businesses (sole traders or partnerships) can choose their accounting year-end.

They’re taxed according to the tax year in which the accounting year-end falls.

What’s changing?

The new rule (referred to as ‘changing the basis period’) will mean that tax liabilities for all unincorporated entities are aligned to the tax year.

When’s it changing?

The reform will take effect for the 2024 to 2025 tax year, with a transition in the tax year beginning 6 April 2023.

How will it impact unincorporated businesses?

If you run an unincorporated business with an accounting period which ends on a date that’s different to the tax year, you’ll be taxed on a ‘tax year basis’ from 6 April 2024.

For example, a business with a 30 June year-end date for 2024/25:

  • Will be taxed 3 months of profits from the 30 June 2024 accounts
  • Will be taxed 9 months of profits from the 30 June 2025 accounts

…rather than the profits for the year ended 30 June 2024, as it currently stands.

The 2023/24 tax year will be the transitional year when the tax position will need to move between the two methods, and this may dramatically increase the taxable profits.

Here’s another example…

For businesses that have a 12-month accounting period ending 30 April 2023, in the 2023/24 transitional year the tax return will recognise:

The profits arising in the 12-month period ended 30 April 2023 (the standard part). The profits arising in the period from 1 May 2023 to 5 April 2024 (the transitional part).

As you can see, profits taxable in the year to 5 April 2024 (due for payment before 31 January 2025), could potentially be much higher as profits for 23 months will be included.

If you have any overlap relief from when your business started or changed accounting period, these overlap profits can be used as a deduction against profits in the transitional year.

Any remaining profit (from the transitional part only) will be spread over 5 years, but you can disapply this if you wish and be taxed all in the transitional year.

Note: HMRC are looking to launch an online system to request information on overlap relief if it’s not available.

how we’ll be supporting clients…

As with many complex tax reforms like this, we’ll bring clarity to our clients and answer any queries they may have. In our organised fashion, we’ll be bringing the preparation of our clients’ accounts forward and doing our due diligence in checking overlap profits where the accounting period’s different to the year-end.

If you’d like to know more about the change to taxation of unincorporated businesses, or anything else relating to tax compliance, reach out to our team.