One-year delay to basis period reform

Reforms to the taxation of unincorporated businesses will go ahead as planned, although they have been pushed back by the government to 2024.

Despite calls for a move away from the ‘basis period rules’ to be scrapped, the Autumn Budget announcement confirmed it will still go ahead, though a year later than previously planned.

The change means that sole traders and partnerships will be subject to income tax on profits arising in a given tax year.

For businesses with an accounting year end between March 31 and April 5, this will mean no change.

However, for other businesses, the change is likely to bring forward the date on which taxable income will need to be calculated and tax will need to be paid.

The Institute of Chartered Accountants in England and Wales (ICAEW) says the move will require estimates to be made of the profits generated in the latter part of a tax year, unless a business reverts to an accounting year that corresponds with the tax year.

The new method of calculating taxable profit will apply from the tax year 2024/25, rather than 2023/24 as previously planned.

The ICAEW says a mechanism will be required for existing businesses to transition from the old to the new regime, so special rules will apply in 2023/24.

In this tax year, some businesses will experience double taxation, as they will be taxed not only on 12 months of profits from the end of the basis period for 2022/23, but there will also be transitional profit based on the period from the end of those 12 months to April 5, 2024.

If the business has any ‘overlap relief’ it will be able to use this against the additional profits arising in the transitional tax year, to mitigate the enhanced tax charge arising.

ICAEW also understands that there will be more flexibility to use this overlap relief than was set out in draft legislation published in July.

Where additional taxable profits remain even after the deduction of overlap relief, business owners will have the option to spread that additional profit over five years.

There have been concerns that this additional profit could have a knock-on effect for other tax purposes in those years, such as the impact on personal allowances and allowances for the purposes of contributions to registered pension schemes.

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