The government has announced a reform to tax on business profits which will align the basis period for unincorporated businesses, including self-employed traders and partners in trading partnerships, with the tax year.
The “current year basis” for taxing business profits is to be replaced with a “tax year basis”, so that in a given tax year a business will report the profit or loss arising in the tax year itself, rather than the accounting period ended during the tax year. As a result overlap profits will cease to be created in future.
Where the change in basis period results in higher profits for a business in 2023/24, these additional profits will automatically be spread out over five years, though businesses can elect out of this treatment.
Self-employed taxpayers, including traders and partners in a trading partnership, which do not currently use an accounting period ended 31 March or 5 April.
The change will have effect from 6 April 2024, with transitions occurring and any overlap relief being received during the 2023/24 tax year.
The change has previously been identified in public consultation as a method of simplifying the tax system for unincorporated businesses, by removing the need to determine basis periods, pay double tax in earlier years and then reclaim overlap relief in the future. The government has announced that it expects this measure to “level the playing field” between comparable businesses which use differing accounting dates.