HMRC is changing the way trading income is allocated to tax years

Unincorporated businesses generally draw up their accounts to the same date each year, the ‘accounting date’. Their profit or loss for the tax year is usually the profit or loss for the year to the accounting date, the ‘basis period’.

HMRC is changing the way trading income is allocated to tax years

However, the government is looking to align all basis periods for unincorporated businesses with the tax year (6 April to 5 April).  This is to facilitate Making Tax Digital for Income Tax Self-Assessment which is due to begin on 6 April 2024.

The reform of the basis period rules does not mean the accounting date has to change, but it may significantly affect the way taxable profits are reported.  The new rules apply from 2024/25 but changes will be implemented during 2023/24 (the transitional year).

Let us assume your accounting period ends on 30 April 2023.

Under current rules you would be assessed for tax on your profits to 30 April 2023 in the tax year 2023/24 and pay any tax by 31 January 2025, 21 months later.

Under the new rules you will see almost two years of profit being taxed in 2023/24, being profits arising in the 23 month period from 1 May 2022 to 5 April 2024.  The profit from 1 May 2023 to 5 April 2024 will be based on the 30 April 2024 accounts and the tax on those profits will be due for payment just 10 months later (31 January 2025).

The new rules may have a serious impact on cash flow and potentially on long-term planning and investment.

It is possible that this year of change could push a trader into the higher tax brackets, impacting not just their tax liability but the benefits they receive (such as child tax benefit) and other items linked to taxable income (such as restriction of the personal allowance which results in an effective tax rate of over 60%).

There may be ways to improve the tax position.  For example, perhaps there are losses to be claimed following Covid-19 or there may be overlap relief available to reduce an increase in profits.

If the tax impact of the change would have a severe impact on your cash flow, it may be sensible to adjust your accounting year date now.

We are in the process of reviewing our clients’ circumstances in detail to ensure appropriate action is taken now to alleviate the impact of these new rules.

If you have any queries or would like to discuss this further please do not hesitate to contact Diane Nettleton on 01633 653167 or by email –