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Making Tax Digital And The ‘Tax Year Basis’ – Part 2

Update: The move to a ‘tax year basis’ of assessment has been delayed until 6 April 2024, with the transition year being 2023/24.

Our previous article mentioned the recent consultation launched by HMRC to discuss the move to tax business profits subject to income tax on a tax year basis, i.e. 5 April (or 31 March), irrespective of their chosen accounting year. Although not in legislation yet, it is anticipated that this will be included in the next Finance Bill to facilitate the commencement date of Making Tax Digital for income tax (MTD4IT).

The commencement date will be 6 April 2023 and this means that the 2022/23 tax year will be a transition year. Many businesses will already be in their accounting year to be taxed in 2022/23. For example, if you prepare accounts to 30 June then you are currently in the financial year to 30 June 2022 which will form your taxable income for the tax year 2022/23. It is therefore important to consider the implications of this transition now.

The taxable profits for 2022/23 will include the accounting period ending in 2022/23 plus the profits to 5 April 2023 and deduct any overlap relief available. Overlap relief may have been created at the start of a business or during the transition to the current year basis. For example, a business with a 30 June year end may have taxable profit of £50,000 in the year to 30 June 2022 and £60,000 profit in the period to 5 April 2023, a total of £110,000. Deduct overlap relief of say £20,000 and the total taxable profit for 2022/23 will be £90,000, significantly higher than first expected. A further relief suggested is that the excess profits can be spread and taxed over 5 years.

You do not have to change your annual accounting date, and there may be commercial reasons for that, but the profits will be time apportioned to meet the tax year. It may not be possible to finalise your tax position until the following years accounts have been prepared and estimates will have to be used.

It is important that you discuss your accounting periods with your accountant now to ensure a smooth transition. If you would like to discuss this or any tax matter, please get in touch with our EQ Taxperts by calling one of our offices or emailing [email protected].

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