In the 2021 Budget. proposals to reform the income tax basis periods were confirmed. The intention was to help with the introduction of Making Tax Digital for Income Tax Self Assessment (MTD ITSA).
This will affect all business who have accounting periods that do not align with the tax year and are taxed to income tax rather than corporation tax. It will be introduced for the 2023/24 tax year. Thereafter, all profits will be taxed in accordance with the tax year, rather than their accounting year so if your business has a year end which is not 31 March or 5 April then please continue to read…
As a business, you are not required to change your current accounting year end, but computations will be needed to report your profits for the tax year. For example, a business with a June year end will need accounts for 30 June 2023 and 30 June 2024 for the 2024 Tax Return. This reduces the available period in which to prepare the accounts ahead of the 31 January 2025 deadline. It becomes even shorter when looking at a 30 September year end.
It is possible to file Tax Returns with estimated figures and submit amendments after the filing deadline when the accounts are agreed, but this does extend the enquiry window for that section of the Tax Return.
If you are considering starting a business, then it may be sensible to use 31 March or 5 April as your year end.
Should you wish to change your accounting year end to match the tax year, then a transitional year will be required. This should mean that you can utilise overlap profits that may have arisen at the start of the business, to offset against a period where more than 12 months of profits will be included.
You may wish to consider looking at a change of accounting date this year, as from April 2024 MTD ITSA commences and this will affect our workload. However HMRC have provided transitional relief in 2023/24 which allows for profits to be spread over 5 years. Where profits are increasing this may be a useful option, but if reducing then an early adjustment could be more beneficial.
Increasing profits
| Year to 30 September 2022 | £55,000 |
| 6 Months to 31 March 2023 | £32,000 |
| Less overlap profits | (£6,000) |
| Taxable profit 2022/23 | £81,000 |
Reducing profits
| Year to 31 July 2022 | £28,000 |
| 8 Months to 31 March 2023 | £8,000 |
| Less overlap profits | (£13,000) |
| Taxable profit 2022/23 | £23,000 |
Where overlap relief is unknown or papers have been lost over time, then HMRC have advised that they will provide this information or information to assist with calculating the figure.
If your business is caught by these reforms and you are considering making any changes to your accounting dates, please get in touch with your usual Lambert Chapman contact and we will be happy to discuss this with you and agree what will be the most beneficial position for you and your business.
Disclaimer
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.