Reporting changes: it’s time to heed the taxman’s warning

Unincorporated businesses, such as sole traders or partnerships, that don’t already draw up their accounts to 31 March or 5 April each year should give serious consideration to changing their accounting date to avoid tax complications in the future.

How income tax payable by unincorporated businesses is calculated changed from 6 April this year under new rules brought in by HMRC.

The tax body is worried that many still seem to have not heeded its warnings about how it will impact them. Put simply, some could end up paying much more in tax and be burdened with extra unnecessary admin, too.

Veterinary practices have not been exempted from the change. Since 1999, it’s become much easier for them to be owned and run by companies. However, a number still operate as sole traders or partnerships. In 2019, the Federation of Veterinarians of Europe published its survey of the veterinary profession in Europe. For the UK only, it noted that 9% were operating as sole traders and another 9% were run as partnerships. It should be said that 32% either didn’t declare or didn’t respond.

Back to the change, which is known as “basis period reform”. This will make little or no difference to the many businesses that already have a 5 April or 31 March year end. However, Emma Rawson, technical officer at the Association of Taxation Technicians, said: “For those with accounting years that do not align with the tax year, the impact will be significant.

“Many businesses who could be hit by this change remain unaware of it. The resulting temporary increase in their tax bills, and ongoing additional admin burdens could, therefore, come as a nasty shock.”

While little can be done about the additional tax, she added: “Taking steps now to change your accounting date could help make your life easier in the long run.”

What changed

Currently, once established, sole traders and partnerships pay income tax on the profits of their accounting year ending in the tax year; for example, if a trader draws up accounts to 31 December each year, in the tax year 2022-23 it will be taxed on profits for the year ended 31 December 2022.

From April 2024, Ms Rawson explained this will all change, and they will instead pay tax on the profits they actually earn in any one tax year – that is, from 6 April to the following 5 April.

She added: “Tax year 2023-24 is a ‘transitional year’ in which the tax system swaps over from the current basis to the new tax year basis. To achieve this, special rules apply to calculate taxable profits and tax. Effectively, those that have a year end other than 31 March or 5 April will be taxed on their normal basis period plus an extra amount of profits to bring them up to the end of the tax year.”

She gave the example of a business with a 31 December year end that will be taxed on its profits for the year ended 31 December 2023, plus their profits for the period from 1 January 2024 to 5 April 2024.

Ms Rawson highlighted that this will result in more than 12 months’ worth of profit being taxed in 2023-24. On helping ease any additional tax arising as a result, she explained: “Businesses can offset any ‘overlap profits’ they may have from their early years of trading (when they may have been taxed twice due to how the old basis period rules work).

“They may also be able to spread any remaining ‘excess profits’ over up to five years.”

The problem outlined

As noted previously, the transitional year rules could see a temporary increase in the tax payable by businesses without a 31 March or 5 April year end. However, for Ms Rawson, that is not the end of the story, as these businesses will also experience ongoing additional admin burdens. In particular, she warned that once these changes come in, those that draw up accounts to something other than 31 March or 5 April will have extra work to do each time they complete their tax return.

She said: “To get to the profits for a tax year, they will need to combine amounts from two separate sets of accounts and, depending on how late the accounting date falls, the second set of accounts may not be ready by the time they come to file their tax return.”

By way of example, if the trader has a December year end, to calculate the profits for the 2024-25 tax year, they will need to take amounts from their accounts for both the year ended 31 December 2024 and the year ended 31 December 2025. However, as the deadline for filing the tax return for that year is 31 January 2026, Ms Rawson believes it highly unlikely that they’ll have the second set of accounts ready in time.

Where this is the case, she said: “They will have to estimate the amount of profits to take from the second set of accounts and include a ‘provisional figure’ on the tax return. They will then need to amend the return to correct that provisional figure within one year of the original filing deadline (that is, by 31 January 2027 for a 2024-25 return).”

Irritatingly, these extra steps are not a one-off, but will recur every year when they prepare their tax return.

Making the change

So, with the change set out, the best way to avoid these ongoing administrative burdens is to change accounting date to 31 March or 5 April.

Luckily, for the moment, Ms Rawson explained it is possible to change the accounting date by drawing up a set of accounts for a shorter, or longer, period than usual, ending with the new accounting date.

She said the best time to make this change may be during the transitional year 2023-24. She said: “Special rules applying in that tax year may allow them to ‘spread’ any excess profits they have to bring into account as a result over up to five years – something which isn’t available if they make the change in any other tax year.”

Reducing burdens

Unfortunately, moving the accounting date will not help the trader escape any temporary increase in tax as a result in the change of the basis period rules. However, it will greatly reduce their ongoing admin burdens, as they won’t have to worry about splitting accounting figures between tax years or estimating and then correcting provisional figures. This will clearly save time and effort, and Ms Rawson said: “[It] may also help avoid a significant increase in fees if they pay someone to prepare a self-assessment return.”

Tax return fees are likely to increase for businesses with an accounting date other than 31 March or 5 April, as tax agents will have to do more work to calculate the profits for the year, as well as having to amend returns to correct any provisional figures used.

Ms Rawson added: “Changing an accounting date will undoubtedly make a trader’s life easier from a tax perspective.”

Summary

Before making any business change, good advice is necessary to weigh up what’s best for the business overall alongside the tax-related issues. Time spent with an accountant or tax advisor in seeking more help and information would be a wise investment.