Income tax ‘basis period’ rule change

Draft legislation on the proposal to reform income tax basis periods was released on 20 July 2021 in the build-up to Finance Bill 2022.

If you are a sole trader or partnership with an accounting year-end other than 31 March or 5 April, you should read on to find out how this change will affect you.

Aligning taxable profits with the tax year

From the 2023/24 tax year, it is proposed that taxable profits will be aligned with the tax year, and so the basis period of assessment will either be the year ending 31 March or 5 April. For taxpayers who currently have an alternative year-end, 2022/23 will be a transitional year.

The transitional year

In the transitional year, ‘current year’ profits will be taxed in the usual way, but profits arising in the period between the current accounting year-end and 31 March/5 April will also be taxed.

Overlap profits

It’s worth noting that any previously created overlap profits can be relieved in 2022/23 to reduce the burden but, given that these are often created in the earlier years of trading when profits are generally lower, this could in many cases result in a significant tax liability in 2022/23.

Spreading the tax burden over five years

The draft legislation proposes to allow this tax burden to be spread over a five-year period to ease concerns over cash flow. And, although the ability to spread this adjustment over five years will be welcome, it will be important for anyone who is affected to understand in advance the additional tax burden which may arise and how it can be funded.

As a general rule of thumb, clients with year ends of 30 April, 31 May, and 30 June will be affected more significantly than those with year ends closer to 31 March such as 31 December, 31 January, 28 February.

Let us help you

Whilst the legislation is not yet final, we can help you to consider your specific position in further detail and plan for these proposed changes – please get in touch with Stuart Petrie or your usual AAB contact and we will be happy to help you decide on the best course of action to meet your needs.