What are the changes to tax periods for self-employed?

October 11, 2023

Are you ready for the changes to tax periods for self-employed?

The allocation of profits to tax years for the self-employed is undergoing a massive change in 2023/2024.

The government suggests this is a change to ‘simplify’ the taxation process for the self-employed. However, it will accelerate the taxation of profits for certain businesses, with the worst affected suffering nearly two years of income taxed in one year. There are, however transitional rules to ease the cashflow burden.

The changes only impact sole traders and partnerships but include limited liability partnerships.

What are the changes?

To understand the changes, one needs to know how things currently work. So here is the position for 2022/2023.

The affected businesses are currently taxed on the profits arising in the year ending in the tax year. So, if your year-end is 31 October 2022, the profits from this year-end are taxed in the tax year 2022/2023.

When a business starts, there is a period of profits that are taxed twice, which are relieved against the profits in the year when the business ceases.

This is called the current year basis.

The legislation is changing so that businesses shall be taxed on the profits earned in the tax year – the period to 31 March [or 5 April] each year. So if your year-end is not prepared to 31 March, you will have to carry out a calculation to work out the apportioned profits.

In the transitional year, 2023/2024, the businesses will be taxed on the current year basis plus an extra amount to cover them up to the end of the tax year. So a business with a year-end of 31 October would be taxed on the year’s profits to 31 October plus the profits from 1 November to 31 March. There will be the opportunity to deduct the profits duplicated in the tax year the business started [known as overlap profits]. 

In this example, the total profits tax would be 17 months’ worth. There are transitional rules to allow the extra profits to be taxed over five years to assist with cash flow.

This is quite a change, and the impact can be significant, particularly if profits fluctuate.

The rules are already in force, so they will apply; options that can be taken are reconsidering incorporation for unincorporated businesses or changing the year-end.

Please see our flow chart that sets out the decision process to consider when considering changing your year-end.

If you wish us to help you decide whether to consider changing your year-end or incorporating, don’t hesitate to get in touch with us.

 

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