The way your taxable profits are calculated is changing and this will affect how much tax you pay and when.
If you are a sole trader or an individual partner in a partnership, from the 2024/25 tax year (tax year ending 5th April 2025) onwards, you will be taxed on the profits for the tax year (the tax year basis) rather than, as now, on the profits for the accounting period ending in the tax year (the current year basis).
If you are a sole trader or an individual partner in a partnership, from the 2024/25 tax year (tax year ending 5th April 2025) onwards, you will be taxed on the profits for the tax year (the tax year basis) rather than, as now, on the profits for the accounting period ending in the tax year (the current year basis). If you prepare your accounts to a date other than 5 April or 31 March (which is treated as equivalent to the tax year) you will need to apportion your profits from two accounting periods to arrive at the profits for the tax year.
To move from the current year basis to the tax year basis, the 2023/24 tax year (tax year ending 5th April 2024) is a transitional year. The profits taxed in 2023/24 are those for the period from the end of the basis period for 2022/23 (i.e. the accounting period ending in the period from 6 April 2022 to 5 April 2023) to 5 April 2024. Where the accounting period does not align with the tax year, profits for more than 12 months may be taxable in 2023/24. Relief for any unrelieved overlap profits is also given in 2023/24. These are profits that were taxed twice in the early years or on a change of accounting date.
To prevent traders from being hit with a very high tax bill in 2023/24 without having the benefit of higher profits from which to pay the bill, the additional profits assessed in that year (i.e. those from the end of the previous accounting period to 5 April 2024, less any overlap relief) are spread over 5 tax years from 2023/24 to 2027/28 inclusive. Where this is not beneficial, an election can be made for profits not to be spread.
We can explain what the move to the tax year basis means for you and discuss whether a change of accounting date would be beneficial. Please get in touch to discuss further.
Making Tax Digital (MTD) for Income Tax Self-Assessment
You may be aware, but if you are not, all VAT registered businesses are now required to use MTD compliant software to prepare and file their VAT Returns.
Update: The mandatory use of software is therefore being phased in from April 2026, rather than April 2024.
From April 2026, self-employed individuals and landlords with an income of more than £50,000 will be required to keep digital records and provide quarterly updates on their income and expenditure to HMRC through MTD-compatible software. Those with an income of between £30,000 and £50,000 will need to do this from April 2027.
The government has also announced a review into the needs of smaller businesses, and particularly those under the £30,000 income threshold. The review will consider how MTD for ITSA can be shaped to meet the needs of these smaller businesses and the best way for them to fulfil their Income Tax obligations. It will also inform the approach for any further roll out of MTD for ITSA after April 2027.
Mandation of MTD for ITSA will not be extended to general partnerships in 2025 as previously announced.
You may be aware, but if you are not, all VAT registered businesses are now required to use MTD compliant software to prepare and file their VAT Returns.
However, with effect from April 2024, MTD is being extended to all sole-trader businesses and landlords, regardless of whether they are VAT registered or not, with gross income or turnover (not profit and excluding VAT if relevant) above £10,000. With such a low threshold, this will mean that it will affect virtually all sole-trader businesses and landlords. The same rules will not be introduced for partnerships until April 2025 and the date that it will affect Limited Companies has not yet been announced (although the thinking is that it will not be too long until it does). Please note that if you are a sole trader business and also a landlord the £10,000 threshold applies to the combined income from both sources and not £10,000 for each source.
Whilst April 2024 may seem some while away, preparing for MTD does take some time and the date to which the annual accounts are prepared will also impact the date from which sole-traders and landlords should consider when it is best to move over to using MTD compliant software.
I would therefore urge anyone who is going to be affected by these changes, and who is not already using MTD compliant software, to contact us so that we can discuss the options available and timings to ensure that all affected sole-traders and landlords become MTD compliant in time for when the new rules are introduced.