Tax Reform for Sole Traders and Partnerships

These reforms apply to individuals carrying on a trade or profession as sole traders or partners in a partnership.

It only applies to these businesses who prepare annual accounts to a date other than 31 March or 5 April.

The proposal means that business profits of unincorporated businesses will be calculated on a tax year basis rather than using an accounting year. Moving to a tax year basis will require unincorporated businesses to report from the 6 April to the 5 April tax year for trading purposes regardless of their actual period of account.

Business with non-tax year end periods of account will be required to apportion profits or losses across periods of account to adjust their results to the tax year basis. The tax year of transition is to be the 6 April 2023 to 5 April 2024 with full implantation from 6 April 2024.

In 2023-24 continuing businesses will be taxed on their profits on the current year basis (i.e. for the 12 months to their accounting date in 2023 – 24) plus the period up to 5 April 2024. Depending on the accounting year of the of the business, this could bring up to two years profits into charge for the years; businesses with a 30 April, 31 May, 30 June year end could be particularly impacted.

As this reform could lead to a significantly increased tax liability, the proposals provide for the excess tax liability to be spread over a period of five years to mitigate the Cash Flow impact. In addition, it is proposed that the taxpayer’s entitlements to Child Benefit and tax relief on pension contributions will not be adversely affected.

In the short term, sole traders and partnerships who do not prepare accounts to the 31 March or 5 April will need to consider the impact on Cash Flow, particularly in the transitional year 2023-24.

For further information, telephone (028) 8224 1515.