Reforms to the ways in which unincorporated businesses pay income tax – known as basis periods – will go ahead, one year later than planned.
Proposals and draft legislation were published in July 2021, suggesting the new rules would commence from 6 April 2023.
Instead, sole traders and most business partnerships will be subject to income tax on profits arising in a given tax year from 6 April 2024.
This will mean no change for self-employed businesses with an accounting year-end between 31 March and 5 April.
But for other businesses, this is likely to bring forward the date on which taxable income will need to be calculated and tax will need to be paid.
This new method of calculating taxable profit will apply from the 2024/25 tax year, rather than 2023/24 as previously planned.
The Government expects this will make it easier for the self-employed and small businesses to claim tax reliefs they are entitled to, but often do not take advantage of, due to confusing existing rules.
The Office for Budget Responsibility said the measure “generates the fiscal illusion of raising revenue when, in fact, it reduces it in the long-term” as it will have no effect on the amounts of profits taxed.
Special rules will apply to self-employed businesses that transition from the old to the new regime during a transitional 2023/24 tax year, during which time some businesses will experience double taxation.
Not only will they be taxed on 12 months of profits from the end of the basis period for 2022/23, there will also be transitional profit based on the period from the end of those 12 months to 5 April 2024.
On transition to the tax-year basis from 6 April 2023, all businesses’ basis periods will be aligned to the tax year and all outstanding overlap relief given.
Get in touch to discuss the basis-period reform.