Are you running your own business or part of a partnership? It is crucial to get acquainted with the upcoming reforms to the tax basis period.
HM Revenue & Customs (HMRC) is set to overhaul the way it assesses and gathers taxes from businesses, focusing on the basis period.
With the close of the fiscal year 2023/24, these adjustments will become operational, impacting how sole proprietors, partnerships, and other non-incorporated entities are taxed.
Understanding the basis period reform
For entrepreneurs and individuals who are self-employed, the traditional basis period has likely been a part of your tax calculation process.
This period is used to determine the taxable profits for a given tax year, aligning typically with the financial year’s corresponding accounting period.
Presently, established companies and sole traders are taxed on the profits earned during the 12-month accounting period ending within the tax year, even if it doesn’t match up with the fiscal year.
For instance, if your company’s financial year runs from 1 January to 31 December, your tax filing for that interval would be due in the following April, with payment required by the January after that.
However, starting from the 2024/25 tax year, every non-incorporated business will see its profits taxed per the financial year, from 6 April to 5 April the next year, irrespective of their specific accounting periods.
Considering the provided example where the accounting period concludes on 31 December, this adjustment means that the business allocates profits from two different accounting periods to comply with the 6 April to 5 April financial year.
Should the financial statements not be ready by the deadline for tax submission, estimated profits for the three months leading up to 5 April must be used instead.
The transitional year concludes with the 2023/24 fiscal year end, aligning business taxation periods with the fiscal year ending April 2024.
To ease the transition, HMRC will permit tax obligations incurred during this phase to be settled over five years, mitigating the strain of additional tax payments.
The first year of trading
For businesses in their first year, the tax rules differ slightly.
You will be taxed on the profits made from your start date to 5 April of that same fiscal year, rather than on a full year’s earnings.
This arrangement leads to ‘overlap profits’ during your initial one or two years, where earnings between the fiscal year-end and your accounting period-end are considered in two separate tax filings.
Adjusting for the 5 April deadline
The forthcoming changes will mean that businesses whose accounting periods do not align with the fiscal year divide their profits for taxation purposes across two separate periods.
This discrepancy could potentially cause a more complex tax situation, increasing the likelihood of errors that may result in penalties or substantial tax liabilities down the line.
Adapting your accounting period to coincide with the fiscal year could simplify financial management and enhance the accuracy of your tax calculations moving forward – helping you to avoid a significant bill at a later date.
You have the option to shorten your business’s financial year by at least one day, as often as necessary, to achieve this alignment.
You can make this easier for you and your company by maintaining diligent financial records.
We’re here to assist you in navigating your tax responsibilities and guide you through these latest tax regulations.
For guidance on adapting to the basis period changes, reach out to us today.
