Income tax assessment basis (November 2023)

Revise SQE BLP update – Basis of assessment for income tax

The rules relating to the basis of assessment of the income profits of unincorporated businesses (ie sole traders and private individuals in partnerships) are changing from the tax year 2023/24, with new rules applying to all such businesses from the tax year 2024/25.

The practical implications of this are that candidates need to be sensitive to these changes when sitting the SQE assessments and appreciate that the old rules are set to become obsolete. It is likely that future assessments will focus on the new rules, but it is still important to have an appreciation of the old rules during the period of transition.

The good news is that the old rules (the opening year rule, current year basis and closing year rule) will cease to apply as the basis of assessment from the tax year 2024/25. This will avoid the problems of overlap profit in the initial years of business and the complex rules that apply both where a business’ accounting period does not correspond with the tax year, or where there is a change in the composition of a partnership.

Instead, where an accounting period does not correspond with a tax year, profits or losses will be apportioned between the relevant tax years, generally on a daily basis (i.e. the number of days of the accounting period that fall within the relevant tax year). Accordingly, the new rules are much simpler, more intuitive, and are easier to state and apply. Candidates have frequently found the old rules to be challenging.

From the tax year 2023/24 all new businesses will be subject to the new rules, with transitional provisions applying to existing businesses until the tax year 2024/25. The transitional provisions are complex, and candidates should not be expected to know their detail or scope.