If you’re a sole trader or a partner in an unincorporated or incorporated partnership, upcoming changes in tax rules may affect you. These reforms alter how businesses like yours are taxed.

Overview of the Basis Period Reform

HMRC is changing how taxable profits are calculated. Previously, unincorporated businesses were taxed on a ‘current year basis,’ but starting from the tax year 2024/25, a shift to a ‘tax year basis’ will occur.

Under the old system, profits were taxed based on the 12-month accounting period ending in a particular accounting period end date. With the new system, profits from an accounting period will be split between the tax years they fall into i.e. instead of being able to choose an accounting period end of say 30 April, or 30 November, all yearends for the purpose of tax will now be 5 April.

The goal of the reform is to simplify the basis period rules for self-employed individuals, aligning the taxation of their income with rules for other sources like property and investments.

The reform primarily impacts sole traders or partnerships with accounting periods that don’t align with the standard UK tax year (April 6th to April 5th). The transitional period is considered to be 2023/24, with 2024/25 marking the beginning of the new basis period.

Who’s Affected by the Basis Period Reform?

Any unincorporated businesses, including sole traders and partnerships and LLP’s (limited liability partnerships) with accounting periods not aligning with the UK tax year will be affected. Most businesses align their accounting periods with the standard tax year, avoiding the impact of these reforms. Limited companies are not affected.

Potential Impact on Tax Payments

If your accounting period doesn’t align with the UK tax year end (April 5th), you may face unexpected higher tax payments in 2023/24 due to the transition. Relief measures have been introduced by HMRC to address this.

The tax year from April 6, 2023, to April 5, 2024, serves as a transition period with specific rules. Businesses may need to pay tax on both ‘current year’ profits and transitional profits generated between the accounting period end and April 5, 2024.

HMRC acknowledges the potential financial burden and will spread transitional profits over the next five tax years to reduce immediate cash flow impact. Businesses may also deduct overlap profits, which could lower the taxable amount.

What you need to do

If your accounting period ends between March 31st and April 5th (inclusive), you will not be affected. If you are a Vantage Accounting client, we will manage the transition period and let you know what the tax impact is, if any. If your accounting period doesn’t align with the UK tax year end (April 5th), there are ways that you can mitigate the impact of these HMRC changes and effectively reduce your tax liability. Firstly, consider maximising your pension contributions. By contributing to your pension, you not only secure your retirement but also benefit from tax relief on your contributions, effectively lowering your taxable income. Additionally, explore

investments in schemes such as Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), or Venture Capital Trusts (VCT). These investment vehicles offer tax incentives, including income tax relief and capital gains tax exemptions, thus reducing your overall tax burden. By diversifying your investment portfolio with these tax-efficient options, you can optimise your finances while navigating the changes in tax regulations. It’s advisable to consult with a financial advisor to tailor these strategies to your specific circumstances and goals.