More changes for unincorporated businesses

More changes for unincorporated businesses

Unincorporated businesses are going through their biggest tax change for a generation, with the switch to a tax year basis of assessment for profits, rather than the ‘basis period’ system. Further change is on the way. For the last ten years, smaller businesses have had the option of preparing their tax computations on a cash basis (i.e. looking at when money is received or paid) rather than the normal accruals basis of accounting. The latter matches income and expenditure to the periods to which it relates, irrespective of when amounts are paid or received. Legislation is being introduced to expand the cash basis for self employed taxpayers, including those in partnerships, from the tax year 2024/25. The changes will not apply for property businesses, companies or those entities already excluded from the current cash basis regime (such as farming and creative businesses making a profits averaging election). The changes will make the cash basis the default method of calculating profits, with businesses able to opt to use the accruals basis instead. Businesses can currently use the cash basis if their turnover is less than £150,000 p.a. and must leave the cash basis when their turnover exceeds £300,000. These restrictions will be removed completely. Where the cash basis is used, there is currently a limit of £500 on the amount of interest which the business can deduct for tax purposes against the profits for the year. This limit will be abolished, allowing tax relief for full interest costs, as long as they are ‘wholly and exclusively’ for the purposes of the trade. Lastly, the current restrictions on the utilisation of losses under the cash basis will be removed, so that losses can be set against general income of the same period or carried back to earlier years(as with losses under the accruals basis and subject to the same conditions)

This change will be significant for all unincorporated trading businesses, particularly as regards whether to elect to stay with accruals accounting in 2024/25. We can discuss the pros and cons with you.

The complete Spring Newsletter can be found here