Tax Year Basis Reform: What It Means for Unincorporated Businesses in the UK

Tax Year Basis Reform: What It Means for Unincorporated Businesses in the UK

The UK government has introduced significant changes to the taxation of unincorporated businesses, moving to a ‘tax year basis’ from April 2024. This reform aims to align taxable profits directly with the UK tax year, which runs from 6 April to 5 April. Previously, businesses could choose their accounting period, sometimes leading to complex tax calculations and ‘overlap profits’.

Key Changes Under the New Rules

1. Transition Year (2023/24 Tax Year)

The 2023/24 tax year acts as a transition period. Businesses will be taxed on:

• Profits for the 12 months following their last accounting date
• Any additional profits earned up to 5 April 2024

This change may result in some businesses being taxed on more than 12 months’ worth of profits, leading to what is known as ‘overlap profits’—profits that have been taxed twice.

2. Overlap Relief

To ease the transition, businesses can claim overlap Relief to offset any double-taxed profits. Reviewing past tax returns will be crucial in determining how much Relief can be claimed.

3. Impact on Accounting Dates

Businesses can keep their existing accounting dates, but if their financial year doesn’t align with the tax year, they will need to:

• Apportion profits across different tax years
• Use provisional figures when submitting tax returns

To reduce complexity and administrative burdens, aligning the accounting period with the tax year could be beneficial.

What This Means for Your Business

• Increased Administrative Work – Businesses with non-aligned accounting dates must estimate and adjust yearly profits.
• Cash Flow Implications – If significant overlap profits are taxed in the same year, it could impact cash flow. Planning ahead is key.

How to Prepare for the Tax Year Basis Reform

•  Review Your Accounting Period – Consider aligning it with the tax year to simplify compliance.
•  Check Overlap Profits – Work with an accountant to calculate and claim available overlap relief.
•  Plan for Cash Flow Adjustments – Understand potential tax liabilities and manage finances accordingly.
•  Seek Professional Advice – A tax specialist can help you navigate the transition smoothly and optimise your tax position.

Need Help Navigating the Changes?

At Naseems Accountants, we specialise in helping businesses stay compliant and minimise tax burdens. Contact us today for expert advice on how this reform affects your business.