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Significant Changes for Business Owners: Basis Period Reform Impacts Sole Traders and Partnerships

17 Jul 2023


Significant changes are ahead regarding how you report and pay taxes on your profits. The basis period reform is coming, affecting sole traders and partnerships (not limited companies) with year ends that don’t align with 31 March or 5 April. 

Starting from the 2023/24 tax year, the reform will align your business’s year-end with the tax year. This change aims to simplify and be more consistent when calculating your taxes. 

What does this mean for you? 

You’ll need to report and pay taxes on your profits from the day after your last accounts were prepared for the 5 April 2023 tax year until 5 April 2024.  

For example, if your year-end is 30 April, your 2023 tax return will cover profits until 30 April 2022. Then, your 2024 tax return will include earnings from 1 May 2022 to 5 April 2024, covering 23 months. 

Some provisions are in place to help reduce the extra taxes you might face due to these changes. Any previously taxed twice (overlap profits) can now be deducted from your taxable earnings during the transitional year. Additionally, any extra profits generated in the year of change can be spread out over five years, starting with the transitional year. 

Here are some strategies to consider for managing this transition: 

  • Early adoption: If you still need to submit your 2023 tax return, you might want to change your year-end early. This could be helpful if you expect lower taxable profits in 2023 or plan to invest heavily in equipment, which can provide additional deductions. 

  • Bring forward capital expenditure: Consider making necessary purchases earlier to reduce your taxable profits during the transition year. 

  • Pension contributions: If your profits usually fall below the higher tax rate threshold, contributing to a pension fund can help extend your basic rate band, preventing higher taxes on the extra profits. 

 

Remember, it’s crucial to seek advice from professionals before making any decisions. Talk to your accountant to get personalized guidance based on your specific circumstances. 

These changes are optional, and you can keep your original year-end. However, this might lead to more administrative work and timing issues with your tax return submission. 

If you have any questions or concerns, contact your accountant as soon as possible. They can guide you through this transition and ensure you’re prepared and compliant with the new rules. 

Stay informed, plan, and seek professional advice to smoothly navigate the basis period reform. Your accountant is there to help you make the best decisions for your business and minimize any tax-related challenges.  

Contact us for more information or support.  

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