In preparation for ‘Making Tax Digital for Income Tax Self-Assessment’, the method of taxing your ‘sole trade’ profit or ‘share of partnership’ profit has significantly changed.

Using an accounting date of 31 December as an example:

  • a ‘sole trade’ or ‘share of partnership’ profit was taxed in line with the accounting date ending in a tax year (e.g. the accounting year ended 31.12.2022 was the last year to be taxed under the old basis, in 2022/23)
  • under the new rules, profits taxed in 2024/25 will be your results from 6 April 2024 and 5 April 2025 (i.e. 9 months of profits from year ending 31 December 2024 plus 3 months of profits from the year ending 31 December 2025 – which will mean estimating your profits for the year ending 31 December 2025 as your 2024/25 Tax Return will need to be submitted by 31 January 2026!)
    • You will also need to make an estimated tax payment on 31 January 2026 and amend it later, when the accounts have been prepared.  All this will probably have an adverse effect on your cashflow.  

Cash accounting is now the default method for sole traders and partnerships. 2024/25 could be subject to more transitional rules to ensure that income and expenses are not included twice or omitted.  Remember, you can opt into UK GAAP and adjust for accruals, prepayments and other differences. 

As a result of the above complications, many businesses have decided to prepare their accounts to either 31 March or 5 April to correspond with the tax year.

But what about your 2023/24 Tax Return? 2023/24 is “The Transitional Year”.

From 2023/24 tax year onwards, your taxable profits will be taxed on a ‘tax year’ basis under the new basis period reform rules. If your accounting date is not 31 March 2024 or 5 April 2024 it is very likely that you’ll be taxed on more than 12 months of profit and will face a higher tax bill. 

However, if you were taxed twice when you commenced your business, altered your accounting date, or your business commenced trading prior to April 1997 it is likely that you’ll have ‘overlap’ profit which can be deducted from the additional amount of profit taxed in 2023/24.  The remainder of the additional profit can be spread equally over 5 years (2023/24 to 2027/28 inclusive) – unless you elect to be taxed in a different way, if it is more beneficial to you.  This is not straightforward and could ultimately increase your overall tax bill, as additional profit could cause you to lose your Personal Allowance. It is worth thinking about whether it be more beneficial to pay tax on more now rather than later.

To conclude …

These changes will eventually simplify and modernise our tax system.  In the meantime, the transitional year (2023/24) and the spreading of the additional profits over the next four years will need careful thought.  If you would like to discuss how your profits will be taxed in 2023/24 and beyond, how much overlap relief you can claim, changing your accounting date or just keeping matters simple with cash accounting, call CKLG on 01223 810100 for friendly help and advice.