Making Tax Digital for Income Tax (MTD ITSA) is mandated to commence on 6th April 2024 i.e. for the 2024/2025 tax year onwards. In anticipation of this, the way in which the profits of unincorporated businesses (sole traders and partnerships) are charged to tax is also changing.
Which businesses will be affected?
It is important to note that not all unincorporated businesses will be affected. Basis period reform will only affect those unincorporated businesses that do not have a 31 March - 5 April accounting year-end. Though MTD ITSA does not include partnerships initially, basis period reform affects all unincorporated businesses without 31 March - 5 April year ends, sole traders, and partnerships alike.
What is changing?
The existing rules, which tax profits of an unincorporated business on a current year basis, are being abolished. Instead, profits will be taxed on a tax year basis. Therefore, a Tax Return will report profits for the tax year (6 April to 5 April) regardless of when the accounting period ended. An accounting date anywhere between 31 March and 5 April will be treated as being coterminous with a tax year.
Do you have to change your accounting year end?
There is no obligation to change your accounting period. For some businesses, it will not make commercial sense to do so.
However, for those businesses who elect not to change, there will be an increase in the complexities of their Tax Returns, and as such, they can expect their compliance costs to increase.
When should you make the change
2022/2023 is the final year in which the current rules apply. 2024/2025 is the first year in which the new rules will apply.
2023/2024 is therefore a transitional year. In this year, if you change your accounting year end, you will need to report the taxable profits arising for a period spanning more than 12 months.
Depending upon your level of profits, and overlap relief available to you, you may pay more tax. In addition, by changing your accounting year end, the timing of the tax payments will also be brought forward.
Can you mitigate additional tax liabilities?
For businesses who change their accounting year end within the 2023/2024 tax year only, there will be an option to spread the “transitional profits” over the next 5 tax years.
The transitional profit is calculated as the taxable profit arising between the previous accounting year end and 5th April 2024, less any overlap profits brought forward.
Should you act now?
Whether you should change your accounting year end will depend upon a number of factors. Your accounts contact at Torgersens will discuss the basis period reform rules and how they may impact you, with you at your next accounts meeting.
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