HMRC may change your accounting year tax treatment - it's called "basis period reform"

What's the difference between an accounting year and a tax year?

Self-employed people pay taxes on the profit earned during a set period, which is usually a year. Most self-employed businesses prepare their accounts up to 5 April, matching the tax year which runs from 6 April one year to 5 April the following year. If you use untied - this is automatically set up for you.

But this doesn't apply to everyone. You may have a different accounting year-end.

What is it?

Why could an accounting year be different from a tax year?

Some self-employed people have accounting years with a different year-end.

There are several reasons for this - it might be because they started their business at a certain time of year and just kept with that, or an adviser suggested a different date to help with admin.

It could also be due to seasonality purposes, for example, if you're a farmer who harvests and sells crops around March/April each year, you might want a different accounting year-end, so that your profit is fairly consistent each year.

Other reasons could be to purely fall in line with a parallel business that already has an accounting period.

Why does an accounting year matter?

Tax is currently paid on what you earn during your accounting year - with an adjustment at the start and end of the business.

Historically you'll be taxed on profits earned in the accounting year that ends in a tax year. So a trader making profits from 1 January 2021 to 31 December 2021 pays tax on this as part of their 2021/22 tax return. What they earn from 1 January 2022 to 5 April 2022 may be received in the 2021/22 tax year, but won't be taxed until the following year.

Overlap adjustments are made at the start and end of a business to keep things in line. You may see the period that you need to pay tax on referred to as a "basis period".

HMRC now wants to change this, removing the mismatch between the basis period (generally your accounting year) and the tax year.

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What is HMRC planning to change?

HMRC wants to tax on for the profits you make during the tax year. That's it really.

It is saying that if you prepare accounts up to a different date, you'll still need to do calculations for the 12 months up to 5 April (it is also happy with a 12-month period to 31 March). Therefore there wouldn't be much benefit to having an accounting year that ends at any other time of year.

The changes are designed to link with the HMRC programme for Making Tax Digital for Income Tax which will affect millions of people from April 2024. untied is ready as the first end-to-end product recognised by HMRC for MTD.

What would that mean for you?

If you don't currently have a 5 April (or 31 March) year-end, the two main changes are:

  • you will need to prepare accounts to 5 April or 31 March
  • as part of the transition, you may have to pay more tax