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Following the 2021 Autumn Budget, the Government detailed its intention to report profits/losses in line with the relevant tax year (‘Tax Year Basis’) instead of the accounting period that ends in the tax year.  Consequently, self-employed individuals and partnerships that prepare their accounts to a date other than 5 April or 31 March will need to apportion their profit to the tax year. Andrew Knott, a Senior Executive at our Cowbridge office, discusses some of the impacts of this in the blog below.

For example, currently, a business with a 31 December year-end would use the profit/loss for the year ended 31 December 2021 as the basis period for the 2021/22 tax year.

Under the new rules, from 2024/25 the profit/loss would be apportioned on the following basis:

  • 9/12 of profit/loss for the year ended 31 December 2024 and
  • 3/12 of the profit/loss for the period of account from the year ended 31 December 2025

Thought should therefore be given around changing the year end to ease the administrative burden each year.

Transitional Year – 2023/24

To align the current method of taxing profits/losses to the Tax Year Basis, businesses will be taxed on a long period of account in the 2023/24 tax year made up of two elements:

  • A standard part being the normal 12-month accounting period; plus
  • A transition part running from the end of the standard part to 5 April 2024 (‘transitional period profit’)

Using the 31 December year end as an example, the profit/loss arising in the transitional period would be:

  • 12-month period ended 31 December 2023; plus
  • 3/12 of the profit/loss from the period ended 31 December 2024

Two measures have been introduced to reduce the additional tax liability incurred on the transitional period profit

  • Any overlap profit brought forward from the commencement years of the business will be allocated against the transitional period profit; and
  • Any remaining transitional period profits can be spread over a period of up to five years.
Impact of these changes on your business

Based on the 31 December year end, if the accounts for the year ending 31 December 2024 are not finalised by the 2023/24 return filing deadline of 31 January 2025, the 3 months profit will have to be initially estimated and subsequently amended once the accounts are finalised.  This could in turn lead to interest being charged by HMRC.

Get in touch…

We will work with our clients to consider how these new rules will impact them; however, if anyone is unsure or has any questions please get in touch.