Unstable Basis and Unincorporated Businesses

Back in the 2021 Autumn budget, it was announced that the Tax basis period reform will be delayed by one year. This is to align the basis periods of unincorporated businesses (including sole traders and partners of partnerships) with the tax year.

HMRC will implement the tax basis reform with effect from the 6th of April 2023.

This change, from being taxed on profits arising within an unincorporated business’s accounting year to the tax year, takes effect from 2024/25, with the transitional year 2023/24.

How Will This Affect Unincorporated Businesses Tax?

Sole traders, LLPs and unincorporated partnerships that don’t prepare annual accounts to a date that ends between 31st March and 5th April will be affected by these changes.

The tax payable for 2023/24 will be those profits arising during the accounting period ending in 2023/24 – plus the profits between the day after and 5 April 2024.

This means that as of 2024/2025, all businesses affected will need to use the tax year as their basis period. Adjustments and overlap profits won’t exist – and they will be liable for profits arising in that (and subsequent) tax year(s).

For example, an unincorporated business with an accounting year-end of 30 April will be taxed on a total of 23 months of profit during 2023/24 – being the 12 months of profits to 30 April 2023, plus the 11 months from 1 May 2023 to 31 March 2024. Note: 31 March is considered to be aligned with 5 April.

For the tax year 2024/25, all unincorporated businesses will be taxed on the tax year basis – i.e profits arising between 6 April 2024 (or 1 April 2024) to 5 April 2025 (or 31 March 2025). If the accounts aren’t finalised before the deadline, you will be required to include estimated profits.

Concessions For The 2023/2024 Transition Year

There will be the following concessions during the year of transition:

1. Any overlap profits that arise from the early trading years can be relieved in the transition year (rather than waiting until the cessation of the business),
2. Tax-payers suffering a significant tax charge as a result of the change may be entitled to spread the charge, specifically related to the profits of the additional months to 31 March/5 April 2024, over five years – beginning during the transition year.

Unincorporated businesses, with a current accounting year-end of 5 April or 31 March, will not be affected by the change.

If you would like to discuss your options or carry out tax planning, then please do get in touch. Simply click here or call us on 020 7384 0920.

Written by Faizan Sarwar ACA CTA, Tax Manager.