The existing business
Part 1 of 4

This is the Finance Act 2024 version of this article. It is relevant for candidates sitting the ATX-UK exam in the period 1 June 2025 to 31 March 2026. Candidates sitting ATX-UK after 31 March 2026 should refer to the Finance Act 2025 version of this article (to be published on the ACCA website in 2026).

This is the second article on the taxation of unincorporated businesses. It covers some of the issues relating to extraction of profits and the final years of a business. The first article (‘The new business’) covers some of the issues relating to a new business including the choice of business vehicle and the first years of trading. These articles only cover a selection of issues: there are other matters that, while not featuring in either of these articles, may still be the subject of a question in the exam.

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.

Some fundamentals

The cash basis
It should be noted that the default method for calculating the profits of an unincorporated business has changed. The default method is now the CASH basis. Traders who wish to prepare accounts on the ACCRUALS basis must make an election in order to be able to do so. You will be told where the accruals basis has been claimed, otherwise you should assume that the cash basis applies.

The restrictions (in relation to interest costs and losses) which were in place in the past when an election was required for the cash basis no longer apply. Therefore, interest deductions are no longer restricted under the cash basis and loss relief options under the cash basis are the same as those under the accruals basis.

The basis of assessment
The taxable trading profits of an unincorporated business for a tax year are determined in two stages:

1. The profits of the accounting period (as per the accounts) are adjusted for tax purposes.
   
   For a partnership, these tax-adjusted trading profits are then divided between the partners in accordance with the profit-sharing arrangements of the trading period.
   
   
2. The tax year basis of assessment (see below) is then then applied to the sole trader’s or partner’s tax-adjusted trading profits of the trading periods.

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 ATX-UK exam to identify the relevant issues and taxes from the information provided, and to consider the implications of alternative courses of action.

What is required at ATX-UK?
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 tax year basis of assessment

Overview
From the tax year 2024-25 onwards, the CURRENT YEAR basis of assessment for unincorporated businesses (sole traders and partnerships) has been replaced by the TAX YEAR basis.

As a result of this change, rules that you may have come to know and love during your studies of the UK tax system are no longer relevant.

• The current year basis of assessment opening and closing year rules and the rules concerning overlap profits no longer apply.
• The rules for calculating assessable profits on a change of accounting date are no longer relevant.

For taxpayers who had to change from the current year basis to the tax year basis, the tax year 2023-24 was a transitional year, and transitional rules applied.

• This transition from the current year basis to the tax year basis would have used all of a trader’s current year basis overlap profits.
• Transition profits may have arisen in the tax year 2023/24.

A summary of the calculation of taxable trading profit under the tax year basis, and the taxation of transition profits is set out below.

Taxable trading profit under the tax year basis
Under the tax year basis, sole traders and partners are taxed on the profits arising in the tax year, ie from 6 April to 5 April (or 1 April to 31 March). Where accounts are prepared to a date other than 31 March / 5 April, the tax-adjusted trading profits must be time apportioned (to the nearest month) to determine the amount arising in the tax year.

• The taxable trading profit for the tax year in which the business starts is the profit for the period from the date of commencement to 5 April.
• The taxable trading profit for the tax year in which the business ceases is the profit for the period from 6 April to the date of cessation.

The change to the basis of assessment has NOT resulted in any changes to:

• The treatment of capital allowances.
• The allocation of profits between partners.
• The reliefs available in respect of trading losses.

Transition profits
As noted above, the change to the basis of assessment may have resulted in transition profits in the tax year 2023/24. The calculation of these transition profits is NOT examinable. Accordingly, where relevant, the amount of transition profits arising in the tax year 2023/24 will be provided in the ATX-UK exam.

The manner in which transition profits are taxed is set out below:

• One fifth of the transition profits is subject to income tax in the tax year 2023/24, and in each of the four following years.
• The taxpayer can make a claim to accelerate the taxation of the transition profits.
  
  
  • Such a claim might be made, for example, so that an amount of transition profits would then be taxed in a lower tax band than would be the case under the standard rules.
    
    The downside of such a claim would be that the taxation of the profits would be accelerated because the profits would be taxed in an earlier tax year.
    
    
  • Where such a claim is made, the amount of untaxed transition profits carried forward will be spread evenly over the remaining years of the five-year period.
    
    
  • Because of the availability of this claim, in addition to stating the original amount of transition profits, a question in the ATX-UK exam will state the amount which has already been subject to tax.
  • In the tax year in which the business ceases, any remaining untaxed transition profits will be subject to income tax.
     
• For the purposes of the ATX-UK exam, the taxable amount of transition profits is included in the income tax computation as a separate amount of non-savings income.
• The interaction of transition profits with the pension annual allowance and the cap on income tax reliefs is NOT examinable.

Trading losses
Where there is a tax-adjusted trading loss in a basis period, the trader’s taxable 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 which candidates need to be sure of in order to be able to calculate the potential tax saving from the offset of the losses.

1. The precise income and/or chargeable gains which the losses can be offset against, and
2. The periods in which the offset can occur.

Candidates must then take care to consider all of the relevant possibilities in the detail necessary to provide the advice requested.

Conclusion

The rules governing the basis of assessment and 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 also considered in:

• Taxation of the unincorporated business– the new business (for ATX-UK)

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.