Basis period reform and a sole trader with a long-established year end
Ravinder has traded as a sole trader for twelve years, preparing accounts to 30 September. His trading profits have been steady: £48,000 for the year to 30 September 2023 and £52,000 for the year to 30 September 2024. He has no other income and claims the standard personal allowance. He is aware that the tax rules for unincorporated businesses changed and is worried about a large one-off tax bill. His accountant has mentioned a 'transitional year' and an overlap relief figure of £9,400 carried forward from when he started. Ravinder has already paid tax for 2023/24 on the old basis and is asking whether he can spread any extra charge and what his taxable profit will be for 2024/25.
1. Explain how the change from the old current-year basis to the tax-year basis affects Ravinder for 2023/24 and 2024/25, and why a transitional profit arises.
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Under the old rules, Ravinder was taxed on the profits of the accounting period ending in the tax year. For 2023/24 that meant the year to 30 September 2023: £48,000.
From 2024/25, profits are taxed on a tax-year basis - the profits arising in the period 6 April 2024 to 5 April 2025. Because Ravinder's year end is 30 September, that tax year straddles two accounting periods: six months of the year to 30 September 2024 (1 October 2023 – 5 April 2024) and six months of the year to 30 September 2025 (6 April 2024 – 30 September 2024). His taxable profit is therefore an apportionment, not a single accounts figure.
2023/24 was the transitional year. Profits were taxed on the old basis (year to 30 September 2023) plus the profits from the end of that period to 5 April 2024 - here, six months of the year to 30 September 2024, i.e. £52,000 × 6/12 = £26,000. Against that transitional addition, overlap relief of £9,400 is deducted. So the transitional year profit was £48,000 + £26,000 − £9,400 = £64,600.
The transitional profit is the £26,000 less £9,400 = £16,600, and it is this slice that causes Ravinder's concern.
2. Calculate Ravinder's taxable trading profit for 2024/25 and explain how any transitional excess can be relieved.
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2024/25 taxable profit (tax-year basis). The tax year runs 6 April 2024 to 5 April 2025. Ravinder's accounting periods are y/e 30 September 2024 and y/e 30 September 2025.
- 6 April 2024 to 30 September 2024: six months of the year to 30 September 2024 = £52,000 × 6/12 = £26,000.
- 1 October 2024 to 5 April 2025: six months of the year to 30 September 2025.
The second figure is not given in the scenario, so the answer must state that it is required: the taxable profit is £26,000 plus six-twelfths of the profit for the year to 30 September 2025. If that year's profit were, say, £56,000, the second element would be £28,000 and the total £54,000.
Relief for the transitional excess. The transitional profit of £16,600 can be spread over five tax years (2023/24 to 2027/28) by election, rather than being taxed wholly in 2023/24. Each year bears £16,600 ÷ 5 = £3,320 of the excess. Ravinder should elect only if spreading keeps him in a lower band in the earlier years; if his income is comfortably basic-rate throughout, spreading delays the tax without reducing it, and the election is a cash-flow decision, not a saving.
3. Ravinder asks whether he should change his accounting date to 31 March to simplify future years. Advise him, giving one advantage and one consequence.
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Advantage. Aligning the year end with the tax year (31 March or 5 April) removes the need to apportion profits every year. The taxable profit becomes the accounts profit for the year, which simplifies record-keeping, reduces the risk of error, and makes it easier to plan payments on account because the profit figure is known earlier.
Consequence. Changing an accounting date creates a change of basis period and can produce an additional taxable profit in the transition year, because the period from the old year end to the new year end is longer than twelve months. The extra profits are taxed in the year of change, subject to any overlap relief available. Ravinder has already used his £9,400 overlap relief in the 2023/24 transitional year, so little or none may remain to shelter a second transition. He should also consider that a 31 March year end concentrates the accounts and tax return work at the same time as the 31 January filing deadline.
Conclusion. The simplification is real but should not be adopted without modelling the change-of-basis charge. Given that his overlap relief has been consumed, the timing should be planned rather than done casually.