Changes to the ‘basis period’ rules may accelerate tax payments for the self-employed

Following a consultation over the summer, the Government has announced a change to the way in which taxable profits for the self-employed (including individuals who are members of partnerships) are to be calculated.

Under current rules, it is generally the profits from an accounting year, that end in the tax year are taxed. For example, if a business has a 31 May year end, the profits for the year ended 31 May 2021 will be taxed in the tax year ending 5 April 2022.

With effect from 2024/25, these rules will be changed so that the profits for the tax year are taxed in the tax year, as if the accounts were for the year ended 31 March/5 April.

The transition to the new basis will happen in the 2023/24 tax year, with all business’ basis periods being aligned to the tax year, and relief being given for any ‘overlap profits’ (profits taxed twice) when the trade started, the individual became a partner, or the year end changed.

For a business with a 31 May year end, the taxable profits for the 2023/24 tax year will be:

1. Taxable profits for the year ended 31 May 2023

2. Plus: Taxable profits for the 10 months to 31 March 2024

3. Less: All overlap profits brought forward

For many taxpayers, taxable profits, and therefore tax payments, will be accelerated. The Government recognises this, and where there are higher profits in 2023/24 because of the change, the additional profits will be spread over a 5-year period, to smooth the effect.

Whilst the Government state “the reform aims to create a simpler, fairer and more transparent set of rules for the allocation of trading income to tax years” it must, in large part, be linked to the introduction of Making Tax Digital and making it easier for data to be reported, collected, and interrogated by HMRC.

If you would like to understand how the changes to these rules could affect you, please contact us.