How business profits are taxed will be changed from 2023/24, based on the proposed amendments to Schedule 1 of Finance Bill 2021/22.
What will be changed and how does it work?
From 2024/25, sole traders’ and partnerships’ profits will be taxed based on profits arising in the tax year, rather than the accounting periods ending in the tax year.
2023/24 tax year will be a transitional year for this reform and taxable income for businesses will include two parts:
- taxable income for the current accounting period – profit for the 12 months’ accounting periods ending in the tax year; and
- taxable income for the tax year – the profits for the period beginning immediately after the end of the above-mentioned accounting period and ending on 5 April 2024 (the “transition profits”)
As this arrangement might cause significant increases to individuals’ and corporations’ tax bills as well as effecting businesses’ cash flow, the proposals provide a five-year spread over a period for the excess profits tax. Such transition profits would be treated as a one-off taxable income and details of how to determine the transition profits are included in the Finance Bill 2021/22 and further detail is expected to be issued soon.
In the short term, while this reform would simplify certain tax matters, business owners who have a different accounting year-end to the UK tax year may need to look ahead and consider the potential impact of such change on the cash flow position of the business.
In the long run, businesses may consider aligning their accounting period with the tax year to prevent working out the apportion and/or estimate profits as per the new requirement or in fact, moving from a partnership structure to a corporate one.
If you would like to discuss the changes in more detail, please don’t hesitate to get into contact with our advisors here at Signature Tax.