Tax Year Basis of Assessment

17 May 2022

Do you need to change your accounting date?

If you are self-employed and have an accounting period that differs from the end of the tax year – 5 April or 31 March – you are currently taxed on the annual profits ending in that tax year. For example, if your year-end is the 30 April, profits chargeable to tax in 2022-23 will be the adjusted profits for the year ended 30 April 2022.

From 2024-25, you can continue to keep your 30 April year-end, but HMRC will want you to apportion your profits such that you are taxed on profits actually made in the 2024-25 tax year (profits taxed will be from 1 April 2024 to 30 April 2024, plus the eleven months from 1 May 2024 to 31 March 2025).

Changing your accounting date

To avoid this apportionment process you could change your accounting date during the tax year 2022-23 or 2023-24. Instead of continuing to prepare accounts to 30 April, you could prepare an eleven-month period from 1 May to the following 31 March (or 5 April).

Unfortunately, changing your accounting date triggers a catch-up process that may produce a hefty tax bill.

Let's consider our 30 April example. If you decided to change your accounts date to 31 March 2023, your total profits assessed in the transitional year, 2022-23, would be those for the year to 30 April 2022 PLUS the eleven months to 31 March 2023. A total of 23 months assessed in one year.

However, HMRC will allow you to deduct from these 23 months of profit, the profits that were effectively taxed twice when you commenced self-employment. These are called 'over-lap' profits.

What to do

A 30 April year-end is likely to produce additional tax charges if your annual profits have been increasing since you started self-employment. The reverse outcome may apply if your profits have been reducing.

The closer your year-end to 31 March (30 April is the farthest away) the smaller any additional assessments in a transitional year will tend to be.

Our advice?

The options you have are:

• Make a change to 31 March (5 April) for 2022-23.
• Make a change to 31 March (5 April) for 2023-24.
• Keep your present accounting date.

Even though the formal change will not be effective until 2024-25, the two years 2022-23 and 2023-24, provide a window to estimate which is the best route for you to follow.

Like all tax planning matters every case tends to be different, so if your current year end differs from 5 April or 31 March, please call so we can help you consider your options.