HMRC’s upcoming changes under the Making Tax Digital initiative will significantly alter how profits are calculated for self-employed individuals and partnerships. Here’s what you need to know:
Effective Date and Transition Year
Starting from April 2024, all unincorporated businesses will transition to reporting profits on a tax year basis, instead of using their accounting year-end basis. The current tax year 2023/24 serves as a transitional period, requiring adjustments when declaring profits on the tax return.
Affected Businesses
This change impacts businesses with accounting year-ends that do not fall on 31 March or 5 April. These businesses will need to declare profits covering the period from their last accounting date to 5 April 2024 in their 2023/24 tax return.
Impact and Considerations
- Cash Flow and Tax Payments: Businesses may face higher tax bills due to reporting more profits within the transitional year. This could affect cash flow, especially considering payments on account due on 31 January 2024 and 31 July 2024.
- Overlap Relief: Overlap relief, originally designed to prevent double taxation during the transition to self-assessment, becomes crucial. It can offset any overlap profits against the transitional year’s profits, potentially reducing tax liabilities.
- Transitional Losses: If calculations result in an overall loss for the transitional year, it can be treated as a terminal loss, similar to when a business ceases.
Support from HMRC
HMRC plans to introduce a service to assist with overlap relief calculations, utilizing recorded data where available. Businesses without recorded overlap relief figures can use an online form to calculate and apply for relief.
Practical Considerations
- No Deferral of Overlap Relief: There is no option to defer overlap relief for later use, emphasizing the need for proactive tax planning.
- Changing Year-Ends: Even businesses with a 5 April year-end should consider changing to 31 March to preserve overlap relief opportunities.
These reforms aim to streamline tax reporting for self-employed individuals and partnerships, aligning with HMRC’s digitalization efforts.
Partner note: HS260 Helpsheet – Overlap Relief, BIM81020 – Computation of liability: basis periods, Agent Update Issue 109
For Help with Topic above or any Accountancy help – contact us: