Change to ‘tax year’ basis
The Government is proposing to change the basis on which trading profits are subject to income tax for unincorporated businesses and members of limited liability partnerships (LLPs) from the “current year basis” to the “tax year basis”. If the proposal goes ahead from 6 April 2024 (and there is much opposition), there will be a transition year in 2023/24.
This will only affect businesses that draw up their accounts to a date which does not fall between 31 March and 5 April (inclusive). This proposed change will not affect companies.
Businesses won’t be required to change their accounting period-end, but where it doesn’t match the tax year, an apportionment of profits from two sets of accounts will be required, in order to create the figures that need to be reported for each tax year. It may be easier to switch to drawing up accounts to the tax year, or to 31 March.
The transitional year will see up to 23 months of profit taxed in one year, which could create some very large tax bills for 2023/24. There will be a facility to spread excess profits over up to five years, such is the extent of the extra tax charges.
If your accounting period is something other than 31 March or 5 April, we need to talk about how to prepare your business for the proposed change to the rules.