The new business
Part 1 of 2
This is the Finance Act 2023 version of this article. It is relevant for candidates sitting the ATX-UK exam in the period 1 June 2024 to 31 March 2025. Candidates sitting ATX-UK after 31 March 2025 should refer to the Finance Act 2024 version of this article (to be published on the ACCA website in 2025).
This is the first of two articles on the taxation of unincorporated businesses. It covers issues relating to a new business including the choice of business vehicle and the first years of trading. The second article (‘the existing business’) looks at issues relating to the final years of a business. These articles only cover a selection of issues: there are other matters that, while not featuring in these articles, may still be the subject of a question in the exam.
SIGNIFICANT TECHNICAL CHANGE You need to be aware that the rules in relation to the basis of assessment for the unincorporated trader have changed. Although these changes are significant, you will be pleased to learn that for exams in the period 1 June 2024 to 31 March 2025 you do not need to know them in detail. What you do need to know is that many of the rules you have worked with in the past in relation to the current year basis and change of accounting date no longer apply. The changes and the way in which the new rules will be examined are set out below. |
The taxation of unincorporated businesses is an important part of the ATX-UK syllabus and is examined regularly. Almost all of the relevant technical rules relating to income tax and national insurance contributions are covered in the TX-UK syllabus, so there is little that is new at ATX-UK. However, these rules continue to be of vital importance – a sound knowledge of these rules will enable candidates sitting the advanced taxation paper to identify the relevant issues and taxes from the information provided, and to consider the implications of alternative courses of action.
This is not an introductory article: it is relevant to students coming to the end of their studies and finalising their preparations to sit the exam. It is intended to be read proactively – ie statements made should be confirmed as true by reference to the reader’s understanding of the rules or to a relevant study text. This approach will enable situations to be analysed from first principles rather than by reference to a rigid set of memorised planning points.
Questions in the exam are likely to be based around the commercial decisions of the taxpayer. They will require candidates to have a strong knowledge of the technical rules and an ability to apply those rules briskly and accurately. Candidates may be required to identify options that are obviously advantageous, disadvantageous or irrelevant, without preparing detailed calculations – for example, by recognising that a particular strategy relating to the use of losses would simply result in a waste of the personal allowance.
The basis of assessment
The taxable profits of an unincorporated business are determined in two stages:
Tax year basis of assessment
From the tax year 2024-25 onwards, the CURRENT YEAR basis of assessment for unincorporated traders (sole traders and partnerships) is to be replaced by the TAX YEAR basis.
As a result of this you need to know the following:
For exams in the period 1 June 2024 to 31 March 2025 (ie the period in which you are taking this exam):
As a result of these exclusions, for exams in the period 1 June 2024 to 31 March 2025:
Trading losses
Where there is a tax adjusted trading loss in a basis period, the trader’s taxable trading income for the related tax year will be zero. There will also be a loss available for offset against income and/or chargeable gains. There are two main issues that candidates need to be sure of in order to be able to calculate the potential tax saving from the offset of the losses:
Candidates must then take care to consider all of the relevant possibilities in the detail necessary to provide the advice requested.
Pre-trading expenditure
Expenditure incurred in the seven years prior to the commencement of trade is treated as having been incurred on the first day of trading.
Capital allowances
For the purposes of capital allowances, assets purchased for use in the business prior to the commencement of trading are treated as having been purchased on the first day of trading. Assets owned by the trader and brought into the business are treated as having been acquired for their market value at the time they are brought into the business.
The annual investment allowance is increased/reduced for trading periods of more/less than 12 months. Accordingly, the length of the trading period in which significant capital expenditure is incurred can have an effect on the speed with which a business obtains relief for its capital expenditure.
Unincorporated business or company?
A new business can be operated as an unincorporated entity (sole trader or partnership) or as a company. The choice will be made by reference to commercial and legal issues in addition to taking into account the tax implications of the alternative business structures. Commercial issues include the effect of the chosen business vehicle on the ability of the business to raise finance, and the possible belief that a company may be regarded as larger or more financially sound than an unincorporated business. Legal issues include the possibility of dividing the ownership of the business between a number of different owners and the existence of limited liability.
Employ or form partnership?
Where two people are to work together in an unincorporated business, it may be appropriate to consider operating as a partnership as opposed to one of them employing the other. As always, there are legal and commercial implications as well as tax issues to consider here. In particular, it should be recognised that entering into a partnership is a significant transaction due to the ability of one partner to enter into a contract that binds the other partner.
From a tax point of view, the decision requires a comparison of the tax position of an employee with that of a self-employed person. In addition, where the business is loss-making, there is also the issue that the costs of employing someone will create tax and national insurance liabilities (despite the business not being profitable). These employment costs will, of course, increase the loss available for relief, but there is likely to be a timing difference between obtaining relief for the loss and paying the employee taxes.
The rules governing the offset of losses are of fundamental importance in the exam. You must ensure that you can apply the rules efficiently and accurately.
Note: The unincorporated business is considered further in:
Written by a member of the ATX-UK examining team
The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The authors and ACCA expressly disclaim all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.