New Tax Year Basis Will Affect Some Sole Traders And Partners

20th October 2022

The rules HMRC uses to work out taxable profits for income tax in a self-assessment return are changing for many businesses. From April 2024 onwards, sole traders and partners will be taxed on profits generated in that tax year, that is, from April to March. This will be the case regardless of a business's accounting date.

Only taxpayers with an accounting date other than 31 March or 5 April are affected by this reform.

The year beginning in April 2023 is a ‘transitional year’ in which all affected businesses will move to the new way of calculating taxable profits for the tax year. They will need to declare the total profits from the end of the last accounting date in 2022 to 2023 up to 5 April 2024. This means that profits generated over a longer period will be taxable in the transition year.

As an example, if your accounting date is 31 December, you must declare profits from 1 January 2023 up to 5 April 2024 in your tax return for the financial year 2023 to 2024,15 months rather than 12 months.

This return is due on or before 31 January 2025. By default, these additional ‘transition’ profits can be spread over 5 years.

This abolition of basis periods means that any double taxation from the early months of trading will be available to be used. Further instructions on how to claim this ‘overlap relief’, and further guidance on the new rules in general, will be published soon.