Key Update for UK Fiscal Year 2024

Transition to Tax Year Basis in Accounting Standards

In the UK, a significant change in accounting standards affecting the fiscal year 2024 is the transition to a ‘tax year basis’ for calculating trading income, which will take effect from the tax year 2024 to 2025. This reform, introduced in the Finance Bill 2021-22, affects self-employed traders, partners in trading partnerships, and other unincorporated entities with trading income. It aims to simplify and make fairer the allocation of trading income to tax years.

Transition to Tax Year Basis:
Previously, businesses’ profits or losses for a tax year were based on the ‘basis period’, which was usually the profit or loss for the year up to the accounting date in the tax year.

The new measure changes this to a ‘tax year basis’, aligning a business’s profit or loss for a tax year with the profit or loss arising in the tax year itself, regardless of the accounting date.

Impact and Objectives:
This change aims to create a simpler, fairer, and more transparent set of rules. It addresses issues like double taxation of early years of trading profits and the complexity of maintaining records of overlap profits and relief.

The reform is expected to bring the payment of tax closer to the time that profits are earned, thereby improving compliance and reducing tax debt write-off.

Implementation and Transition Period:
The reform will be operational from the 2024 to 2025 tax year, with a transition year in 2023 to 2024. Special rules will apply during the transition year to align the basis periods with the tax year, and any overlap profits will be relieved in full in 2023 to 2024.

For more detailed information on these reforms, you can visit the GOV.UK website.