News and Updates
I am thrilled to announce that my practice is celebrating its 20th anniversary this year! I first received by practicing certificate on 20th April 2004 and have never looked back.
This significant milestone wouldn't have been possible without the steadfast support and trust of my wonderful clients, some who have worked with me since the start. Some of you will recall meeting me when I worked from home or meeting me via Essex Girls in Business, the networking group I ran where I met so many wonderful people. Those who supported me when, as my business was growing, I was awarded the title of Essex Entrepreneur of the year, which in turn saw my business grow from strength and strength and our move to Old Forge Court.
As I reflect on the last two decades, I would really like to extend my deepest gratitude for your continued support.
INCOME TAX CHANGE IN BASIS PERIOD FROM 2023/24
In April 2023 HMRC introduced a major change in the rules dictating when trading profits of unincorporated businesses are subject to income tax.
The existing rules, which tax the profits of the accounting period ending in a tax year (often referred to as the ‘current year basis’), will be replaced with a tax year basis of assessment.
If you already prepare accounts to 31st March or 5th April, these changes will not affect you. However, if you prepare your accounts to a different year-end, you need to be aware of these changes from the 2023/24 tax year.
When is the change happening?
The new tax year basis comes into full effect in the tax year 2024/25. However, the changes will start being felt before then, with the tax year 2023/24 acting as a ‘transitional year’ in which we switch over from the current year basis to the new tax year basis.
As set out below, this transitional year has its own complicated rules around calculating taxable profits. These will, in many cases, result in extra tax being payable.
The new normal
Before getting into the complexities of the transitional year, it makes sense to first look at how the new tax year basis will work from 2024/25 onwards. As noted above, under the tax year basis, businesses will be taxed on their profits arising in the tax year (6th April -5th April), regardless of their accounting period.
For example, the profits taxable in 2024/25 will be those arising in the period from 6th April 2024 to 5th April 2025.
Businesses with a 31st March or 5th April year-end will therefore not see any change as a result of the tax year basis coming into force.
For all other business, I recommend that your accounts are now prepared to 5th April, which will mean a short period of accounts, from whatever date accounts were prepared falling in the 2023/24 tax year to 5th April 2024. If for any reason you cannot change your accounting period-end, this could cause additional issues (please contact us if this is the case).
The tricky transitional year
As noted above, 2023/24 will act as a transitional year in which we switch over from the current year basis to the tax year basis.
This will be achieved by taxing the normal basis period (i.e., the accounting period ending in tax year 2023/24) plus an extra amount of profits to bring us up to the end of the tax year. For example, a 31st December year end will be taxed on their:
profits for the year ended 31 December 2023; plus
profits for the period from 1st January 2024 to 5th April 2024.
This will result in more than 12 months’ worth of profit being taxed in 2023/24.
If you have a 30th April year end, in 2023/24 you will be taxed on:
profits for the year ended 30th April 2023; plus
profits for the period from 1st May 2023 to 5th April 2024.
That’s 23 months being taxed in 1 year.
Two measures are provided to help alleviate any additional tax arising as a result:
- Unused overlap profits can be deducted in full (in many cases, this maybe nil or at least a figure unknown as would relate to the first year you traded (which will be before Goody Chartered Accountants acted on your behalf)).
- Any remaining additional profits after deducting overlap profits can be spread over up to five years.
Although spreading of any remaining excess profits is allowed over up to five years, an election can be made to accelerate the amount of profits brought into account in any one year. This may be worth considering if businesses have a year when profits are lower, or other reliefs available.
Once those profits are determined, it is then necessary to calculate the tax arising on them. This is not as simple as applying the relevant marginal tax rate. Instead, the legislation sets out specific steps to be followed. In summary, these adapt the usual income tax calculation in s23, Income Tax Act 2007 such that the additional profits are stripped out of net income. The tax arising on them is then calculated separately and brought back into account as a standalone amount of tax. Excluding the additional profits from net income in this way helps reduce the impact on other areas of the tax system - for example, they shouldn’t be taken into account when looking at thresholds for the high-income child benefit charge and tax-free childcare. However, this approach doesn’t address all possible interactions. In particular, it will not prevent an individual’s personal allowance being tapered where the transitional rules take their income over £100,000.
The rules are of course all very new, and I am sure we will encounter various specific issues over the next year. If you do have any queries on how this may affect you, please get in touch.
Suzanne Goody
August 2023
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