Basis Period update with our Agricultural Manager Sarah

HM Revenue and Customs are changing the basis period on which profits are taxed, from the accounting year end, to the profits arising in the tax year. This will not impact sole traders and partners with the Accounting years ending 31 March or 5 April.

The 2023/2024 tax year will be a transitional year. The transitional profits are those made between the end of the Accounting period, to 5 April 2024. For example, for a 30 November 2023 year end, the transitional period runs 1 December 2023 – 5 April 2024. Profits arising in these additional 4 months are transition profits. (Note: If a loss is made in this period, it can be fully offset against the profits made in the Accounting period ending in the 2023/2024 tax year).

As a result of the change in basis period and depending on your accounting year end, almost two years’ profits could be brought into the transitional year (particularly for a 30 April accounting year end). In order to reduce the tax impact of the change, transition profits will be spread over 5 years, with the first year being 2023/2024. An election may be made so that all the transitional profits can be taxed in the first year if wanted.?

The transition profits are taxed separately to the other profits, and do not affect net income used in calculating pension annual allowance, loss of personal allowance and high-income child benefit tax charge.

For the example above, in calculating the tax liability for the 2023/2024 tax return both the 30 November 2023 year end, and 1/5 x the transition profits are included. A deduction is allowed when calculating taxable profits in the transition year for any unused overlap profit brought forward from commencement or previous year end changes.

Whilst there is no obligation to change the business year end date to 31 March or 5 April, it may be more practical in some circumstances than apportioning two accounting year ends to create the basis period for tax purposes.