A recent announcement from HMRC said that all self-employed individuals and partners will switch from current year basis to tax year basis from 6th April 2024.

What does this sentence full of accountancy jargon mean?

There’s going to be a significant change in how tax is calculated, which will take effect from the 6th April 2024.

From that point, all unincorporated businesses (so sole trades and partnerships) will be taxed on the profits they’ve made in the tax year, rather than the profits made in the accounting period that ends in that tax year.

If you have a limited company, you are not affected in any way by this change.

Historically, you could have a year end of the 31st July, for example, and you’d pay tax on the profits made in that year, which would be declared in your tax return for the period that ended the following April.

In future, sole traders and partnerships probably won’t have a separate year end date, and everything will revolve around the tax year, ie from 6th April to 5th April each year. (see our note below about The Anomaly!)

The only sole traders and partnerships that will be unaffected by the change are those who already have a year end of the 31st March, 5th April or a date in-between.

Those that are affected will find that they will pay tax on some of their income sooner than they would otherwise have done.

What exactly is going to happen?

Assuming you have an accounting year end of 31st July:

• Tax year 2022 /2023 – If you have a year end of 31st July 2022, you’ll pay tax on the profits made in the twelve months that end on that date.
• Tax year 2023 / 2024 – You’ll be taxed on the profits made from 1st August 2022 to 31st March 2024. Note this is a period in excess of twelve months, which is why you will pay tax on some of your profits before you would ordinarily do so. (This is known as your Transitional Year.)
• Tax year 2024 / 2025 – You’ll pay tax on the profits generated in the twelve months ending 31st March 2025, which continues in future years. This is your ‘new normal’ year end.

What do you need to do?

Although 6th April 2024 feels a long time into the future, we think it’s going to be much better to give this some thought sooner rather than later.

1. This change is being implemented at the same time that you’ll be impacted by MTD (ITSA), where you will have to submit quarterly reports to HMRC using an electronic accounting package. It’ll take time to choose one and become familiar with it, so sooner rather than later gives you time to do that.
2. We can help you decide which of the dates between the 31st March and 5th April is best for you to select for your year end, and to select the best accounting package to go for. We’d rather do that sooner, so that we have the capacity to discuss it with you in as much detail as you may need, and give you time to consider your options.
3. The Key Reason: If you have experienced a significant reduction in profits as a result of Covid, it may be beneficial from a tax position to change your year end NOW rather than to wait until later. To be sure, we may ask you to let us have your accounts information for a longer period the next time we work on them.

It’s possible that bringing profits into the Transitional Year will have a detrimental effect on your personal allowance, pension allowance and student loan repayments, for example. HMRC is evidently planning to update the legislation to ensure this is not the case, but is yet to do so.

The Anomaly

As part of this announcement and the technical guidance, it’s still possible to continue to produce accounts mid-year if you choose to do so. You will be taxed, however, on the profits from April to April. The above outline is a simplified view, and each client will need to consider their own personal position when deciding how to continue.

Our general recommendation is that changing your year end is probably going to be the best option for most unincorporated businesses. Doing so will keep life as easy as possible from an accounting and reporting viewpoint, and keep your accounting costs down.

We will of course be discussing this with our unincorporated business clients, but if you’d like to discuss it before we contact you, please get in touch!