April 2024 will bring significant changes for unincorporated businesses – Are you ready?

If you run an unincorporated business, such as if you are a sole trader or run an ‘ordinary’ or limited liability partnership, you should already have April 2024 in your diary.

That date marks two significant tax changes which will affect how you report and record tax within your business.

The potentially more challenging of the two is basis period reform. ‘Basis periods’ are the periods over which you are taxed.

Basis periods for unincorporated businesses don’t currently have to align with the 6 April to 5 April tax year. Instead, as an unincorporated business, you will be taxed according to the rates in effect at the end of your accounting period. This is the ‘current year’ basis.

So, if your accounting period ends on 31 August 2022, you will be taxed at the rates in effect in the 2022/23 tax year, even though some of the period was in the 2021/22 tax year. This can be beneficial because it can mean a significant delay between generating profits and having to pay taxes on those profits.

Basis period reform means all unincorporated businesses will need to align their accounting periods with the tax year. There is, however, some flexibility insofar as any year-end from 31 March to 5 April is considered to align with the tax year.

Of course, in many cases, the ‘current year’ and ‘tax year’ will be the same. If that is the case for you, then basis period reform will have no impact.

However, if your accounting period and the tax year do not align, then there is a significant change on the horizon because you will need to have moved your tax basis period by April 2024, following a transition year in 2023/24.

And that means you could have to extend your next basis period considerably, which will leave you with a significantly inflated tax bill at the end of the year.

HM Revenue & Customs (HMRC) is suggesting that unincorporated businesses use any unused overlap relief arising from double taxation when they were established to offset the much larger tax bill in 2024.

However, you might already have used this overlap relief, or you might not have had much or any if you were not profitable, or were less profitable than you are now, in the early years of your business.

While you won’t pay more tax overall as a result of basis period reform, a much larger tax bill is still going to have significant implications for your cash flow.

One option you might want to consider mitigating this is to time any significant investments you wish to make in your business in such a way as to reduce your profits in the extended basis period.

Basis period reform is driven by Making Tax Digital (MTD), HMRC’s initiative to digitise the tax system. MTD already applies to VAT but will apply to Income Tax Self-Assessment (ITSA) from April 2024, which will predominantly affect sole traders and landlords with business or property income of £10,000 or more.

It will require businesses turning over more than £10,000 a year to keep digital records, make quarterly digital updates to HMRC and submit their annual returns using HMRC-compatible software.

While both of these changes may seem like some time away, they are both complex and require early action. If your accounting period does not already align with the tax year or you do not already use a cloud accounting package, contact us today for advice.

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