Are you a sole trader or partnership? Are you aware of the changes coming in from April 2024?
Why have we written this post?
From 6 April 2024, there are changes to how self-employed individuals and partnerships report their profits. They will need to report their profits on a tax year basis as opposed to accounting period basis. This brings with it challenges for those impacted and there will be lots of people out there who are not prepared for these changes. We hope this article helps those that need it.
What is an accounting period?
An accounting period is the length of time which a business uses as a basis for measuring their profits. A typical accounting period is 12 months and sole traders and unincorporated partnerships registered in the UK have historically been allowed to choose their own accounting period dates to suit their businesses. For example, a sole trader supplying goods or services to an academic institution may decide to prepare their accounts on a 12-month basis ending 31st August each year to align with the academic calendar.
What is a tax year?
A tax year in the UK runs for 12 months, ending on the 5th April each year.
Issues arise when a business uses an accounting period which doesn’t line up with the tax year, in which case basis-period rules exist to adjust profits where necessary to ensure the correct amount of profit is declared in each tax year.
What’s changing?
HMRC have confirmed that, from 6th April 2024, all sole traders and unincorporated partnerships must report their profits on a tax year basis.
The changes aim to create a simpler, fairer and more transparent set of rules for the allocation of trading income to tax years.
What does this mean for me?
Does your accounting period end between 31 Mach and 45April?
If it does, then HMRC will treat your accounting period as ending on 5 April, unless you make an election to opt out. This means you will not need to follow the complicated rules that will apply to others with a different accounting period.
If you don't have an accounting period ending between 31 March and 5 April
You are able to change your accounting period, subject to conditions and it may be beneficial to change it to a date between 31 March and 5 April.
If you do not change, then you have to follow some complicated rules. Firstly, the tax year ended 5 April 2024 is a transition period. Each year after that, you will be taxed on the profits made to 5 April each year, which may involve more time assessing profits across 2 accounting periods each year.
In the transition period, your profits are calculated as follows:
Your normal profits; based on the accounting period ending in the tax year
Calculate the transition profits; the profits from the end of accounting period to the following 5 April
Calculate any overlap relief*; and deduct them from your transition profits
Add your normal profits to your transition profits and deduct the overlap profits
*You may have overlap relief if you have not always used a 5 April accounting period end. If you think you might have overlap relief, it's best to look at your previous tax returns to see if they included any overlap relief. Note that any overlap relief you have must be used in the 5 April 2024 tax year.
What should I do?
If you’re concerned about how to tackle the change, or the impact it might have on your business, now is the time to get in touch and see how we can help guide you through the transition.
Like all of our blogs, we aim to help make the world of tax more understandable to those it impacts. If one person reads this and feels they have learned something, we consider that a success. If this blog has helped you, please let us know by providing feedback below:
Has this blog helped you?
Yes
No