Introduction:

In the realm of taxation, changes are constant, ensuring the system’s evolution aligns with modern practices. However, these transformations often lead to complexities before they settle into routine. One such significant shift was introduced in the Autumn Budget of 2021, reforming how trading profits for self-employed individuals and partnerships are taxed. Here’s what you need to know about these changes and how they may affect your tax submissions in the coming years.

Simplified Tax Changes: What’s New?

The UK government, aiming for a more streamlined approach, has altered how business profits are allocated for tax purposes. Previously, profits taxed in any given year were those earned in the accounting period ending that year. Moving forward, from the 2024/25 tax year, the focus will shift to the profits apportioned to the tax year itself, a system now referred to as the “tax year basis.”

Who Will Be Affected?

This modification impacts self-employed individuals and partners in trading partnerships whose financial years do not coincide with the tax year (not ending between 31 March and 5 April). While the changes aim to simplify the tax process, they inadvertently introduce new layers of complexity, especially for those with intricate commercial engagements or international tax considerations.

What Are the Implications?

With the new rules, you might face additional administrative work. HMRC had proposed easing these burdens, but the measures introduced are minimal, offering slight respite. From the 2024/25 tax year, you will need to calculate your taxable profits based on the specific parts of your accounting profits that fall into that tax year. While it seems straightforward, it requires you to potentially file provisional figures if your accounts aren’t finalized by your tax return deadline, necessitating subsequent revisions.

Transition Period: The One-Off Challege

The 2023/24 tax year is a transitional phase, where your taxed profits might be based on an extended period and you might deduct any ‘overlap profits’ from earlier years. However, this adjustment can accelerate how soon some of your income is taxed, impacting how you’re subjected to various income-dependent allowances and tax charges.

Losses and Special Reliefs

If you incur losses during this transitional phase due to these adjustments, there might be special reliefs available, allowing some losses to be set against profits from the past three years.

The Digital Shift: Making Tax Digital (MTD) for Income Tax

These changes aren’t happening in isolation. They’re also paving the way for the ‘Making Tax Digital’ initiative, mandating digital quarterly updates and an annual “End of period statement” to finalize taxable profits. This requirement will phase in for most businesses from April 2026 onwards, depending on their turnover, further integrating the taxation process into the digital age.