Navigating Changes in Self-Assessment: A Guide for Sole Traders and Partnerships

Everyone who runs a business in a self-employed capacity, whether as a sole trader or in a partnership is required to complete a tax return and report profits to HMRC. Recent changes, aptly named “Basis Period Reform,” have implications for those with year ends differing from 31 March or 5 April, requiring adjustments in self-assessment practices for the 2023/24 tax year.

What is the basis period reform for the 2023/24 tax year?

If your business prepares its accounts to a date not aligned with the tax year, the traditional “basis period reporting” rules apply until 6 April 2023. However, for the 2023/24 tax year, reporting profits becomes a bit more intricate. For instance, if your accounts are drawn up to 31 December, you’ll now report profits for the 15-month period from 1 January 2023 to 31 March/5 April 2024. Subsequently, profits are reportable in line with the tax year.

Mitigating the Impact

For those affected by extended accounting periods, two reliefs can soften the impact:

1. Overlap Relief: If profits fell into two tax years under the previous reporting rules, you may have overlap relief, typically deducted when your business ceases. This relief can offset profits assessed under the new provisions.
2. Transitional Relief: Taxpayers can opt for transitional relief, spreading additional profits over a period of up to 5 years following the change. This approach helps distribute the tax burden over the 5 tax years from 2023/24.

Addressing Specific Tax Implications

It is important to note that for High Income Child Benefit Charges (and mortgages for example), the later year “transitional profits” will not form part of net income, as there will be a separate “standalone” tax charge in the taxpayer’s tax computation to collect the tax being deferred.

Implications for Taxpayers

For many, these changes won’t drastically alter the tax return process. However, for some, especially those using software that doesn’t easily produce reports for extended periods, the completion of tax returns might become more complex. We recommend proactively compiling relevant information to stay ahead.

While changing your accounting date to 31 March/5 April is not mandatory, it is advisable unless there are compelling reasons not to do so.

Seeking Support

Want some support to work your way through these self-assessment changes?  Our team of experts is ready to provide comprehensive consultation. Contact us for a comprehensive consultation and together we can ensure you are filing the correct information with HMRC.