A brief recap

Previously, the UK tax system had complex rules for sole traders and partnerships whose accounting periods did not align with the UK tax year. Subsequently some businesses ended up being taxed twice on profits arising in an earlier period. This, together with the time lag between earning profits and paying tax, were the main reasons for HMRC implementing a change in assessment.

From 2024/25 onwards, profits will be taxed on a tax year basis, with 2023/24 acting as the transitional year.

This means any unincorporated business that does not prepare accounts to 5 April (or 31 March) must apportion profits from two accounting periods to calculate the taxable profit for each tax year.

What are the ramifications?

• What will be the position for 2024/25?
• Can the accounting date be changed in 2024/25, or how can estimates be improved?
• Does the 2023/24 tax return require amending?
• What is the position regarding transitional profits?

What will be the position for 2024/25?

In 2024/25, individuals operating as sole traders or as partners in a partnership will be taxed on profits arising between 6 April 2024 and 5 April 2025.

However, obtaining income and expenditure details that align precisely with these dates may not always be possible, especially if information is available only for a calendar year. In such cases, an estimate will be required for the remaining period. For example, if the accounting period ends on 31 December 2024, then the estimated period is 1 January to 5 April 2025.

Can the accounting date be changed in 2024/25, or how can estimates be improved?

It is possible to change the accounting period to align with the UK tax year. This means that income or expenses will not be required to be estimated going forward and will instead fall in the period to 5 April 2025 (or 31 March 2025).

It is important to deduct any profits that were already taxed or losses that were already accounted for in the 2023/24 tax year.

However, there may be practical reasons that changing the account period date is not appropriate especially for larger and more complex partnerships where it simply may not be possible. The repercussions for internal and administrative systems could be significant, together with possible international aspects in aligning an accounting date with the US for example.

If a change was considered, then 31 March would be beneficial from a tax perspective – being the longest time lag between the accounting period and the associated tax return (and tax liability) for individuals being due.

Steps can be taken to improve the estimates, though additional compliance costs may be incurred, which should be considered.

Preparing monthly/quarterly management accounts allows the estimate to reflect fluctuations in income and expenses, which may assist with cashflow and perhaps with budgeting.

It may also be possible to wait until actual figures from the next period are available. For example, a business with a calendar year-end may use actuals from 1 January to 5 April 2025 if figures are ready in time to meet the 31 January 2026 tax return deadline. However, this reduces warning time for what taxes are due, so may not be ideal.

Sole traders who will soon be filing quarterly under Making Tax Digital should consider early preparations. Partnerships will join Making Tax Digital in a future tax year.

Does the 2023/24 tax return require amending?

For the 2023/24 tax return, a similar estimation would have been required as outlined for 2024/25. As the actuals will now be available these should be compared with the original estimate to see if the estimates reflect reality. A similar process will be needed for future years.

While this may feel laborious, it ensures that an individual will not end up paying tax on overlapping periods.

Where actual profits are higher than estimated, interest will accrue on the underpaid amount from the original due date until payment. HMRC may also issue late payment penalties, which could be appealed if the original estimate was reasonable.

Conversely, if profits are lower than estimated, a repayment supplement—tax-free—will accrue, though at a lower rate than interest charged on underpayments.

What is the position regarding transitional profits?

Due to the change in basis period rules, many businesses had a longer accounting period in 2023/24. Taxpayers had the option to split the profits from this period, adjusted for previously double-taxed profits. This means that the Income Tax and Class 4 National Insurance is spread over a five-year period, with a fifth of the profits taxable each year between 2023/24 and 2027/28. Where this option was not taken, the profits were fully taxed in 2023/24.

If the business ceases or a partner retires, any profits that were spread will become fully taxable in the year of cessation, crystallising the remainder.

It is also worth noting that in any year between 2024/25 and 2026/27, it is possible for the individual to elect to crystallise the remaining spread profits. This would mean the profits are taxed at the current year’s rates, avoiding future increases in Income Tax or Class 4 National Insurance.

Need Help?

If you have any questions, please get in touch — we’ll be happy to assist.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the authors on the details shown below.

For sole traders please contact Chris Langley (clangley@goodmanjones.com).
For partnerships please contact Alison Hayden (ahayden@goodmanjones.com).