Forthcoming ‘basis of assessment’ reforms will change the way trading income is allocated to tax years for the self-employed. The changes will affect sole traders and partnerships that use an accounting date between 6 April and 30 March. There is no change to the rule for companies.
The reforms will change the basis period from a -current year basis- to a -tax year basis-. Under the current rules there can be overlapping basis periods, which charge tax on profits twice and generate corresponding -overlap relief- which is usually given on cessation of the business. The new method of using a -tax year basis- will remove the basis period rules and prevents the creation of further overlap relief.
The new rules will come into effect in the 2024-25 tax year with 2023-24 being a transitional year. During the transitional year, all businesses- basis periods will be aligned to the tax year and all outstanding overlap relief can be used against profits for that tax year.
Affected businesses in 2023-24 will be assessed on the tax for profits for the:
- 12-month accounting period they have previously been using; and
- for the rest of the 2023-24 tax year - minus any overlap relief that may be due - spread over the next 5 tax years.
The changes do not affect sole traders and partnerships who already draw up annual accounts to a date between 31 March and 5 April.
Affected businesses should ensure they are prepared for the changes as there may be cashflow implications.
