Start planning for accounting basis changes

Changes are coming for how self-employed individuals and partnerships calculate their taxable profits and return them to HMRC.

At present, the profits of a tax year are generally based on the profits of the accounting period ending in that tax year, with special rules for the opening and closing years of a business.

From the 2024/25 tax year, businesses will be taxed on the profits arising in that tax year, calculated by time-apportioning profits of the accounting periods that fall within the tax year. Businesses that cannot finalise the accounts needed for the second part of the tax year in time will have to file returns based on provisional figures and revise them once final figures are available. Businesses can avoid this complication by changing their accounting date to 31 March or 5 April – both dates are treated as aligned with the tax year so avoiding apportionment.

Under transitional rules, taxable profits for 2023/24 will be based on the period from the end of the 2022/23 basis period plus a transition component running from the end of this 12-month period up to 5 April 2024. Any unrelieved overlap profits – generally those that arose in the business’s opening years – will be deducted. Should this calculation result in higher profits than for the normal 12 months, the transitional period additional profits can be spread over a period of five years.

The change runs alongside the implementation of Making Tax Digital for Income Tax (MTD). Businesses will have to use MTD-compatible software to keep digital accounting records, send quarterly digital reports to HMRC of receipts and expenses and provide a digital ‘end of period statement’ to finalise the year’s taxable profit. MTD will generally start on 6 April 2024 for sole traders and from 6 April 2025 for general partnerships.

With just 17 months to go, time can run quickly, so allow plenty of time to plan through the implications of these changes.