What is the Basis Period Reform?
With only 6-months remaining before the Basis Period Reform comes in to force this is a MUST-READ article that explains what “basis period reform” is, who is affected by it, and what actions you should take to report your taxable profits to HMRC correctly.
Disclaimer: Please note that the content of this article is correct at the time of publication. It relies on legislation at the time of publication which may become unreliable in future years. Always check you are seeking the most current advice available.
Currently a “basis period” and therefore the “basis period reform” applies to ALL sole traders, unincorporated partnerships and limited liability partnerships (LLPs) that currently do not prepare their annual accounts with a year-end between 31 March and 5 April.
The basis period does not apply to limited companies.
The “basis period” is defined by the date an individual produces their accounts to, for example 31 October. The year-end profits are taxed on this financial year, known as the “basis period” in the HMRC tax year that the year-end falls “current year basis”.
For example, if the year-end is 31 October 2022, then the taxable profits would be taxed in the 2022/2023 tax return. The HMRC tax year runs from 6 April to 5 April.
For the longest time these complicated rules have proved confusing to new businesses and are often overlooked or applied incorrectly in the start-up years. Even when applied correctly, the rules have given rise to unhelpful double taxation in early years trading profits, and subsequent poor maintenance of accurate records on overlap profits has led to available reliefs being lost or unutilised. Enter The Basis Period Reform…
The BASIS PERIOD REFORM aims to address these issues, ahead of the other HMRC initiative Making Tax Digital for Income Tax (MTD ITSA), by creating a simpler, fairer, more transparent set of rules for the allocation of trading income and the subsequent profits to tax years.
From 6 April 2024, all affected businesses will be assessed against the HMRC tax year 6 April to 5 April. If this is news to you, now would be a good time to act; especially if your financial year-end is somewhere between now and the 31 March 2024.
The “basis period reform” will remove all existing requirements of the complicated “basis period” rules, ending the double taxation on early years trading profits and removes the creation of overlap profits completely.
In short from April 2024, all affected businesses will be taxed using the HMRC tax year as the “basis period” and will only be liable for profits arising in, or apportioned to, that and subsequent tax years regardless of the accounting period the business uses. The “basis period” and the “current year basis” will effectively disappear and reform as the “new tax year basis”.
Implementation of the “basis period reform” has already been delayed by a year, meaning the transitional period to the new rules is taking place right now in the 2023/2024 tax year; to reiterate, the new rules of “basis period reform” will come into force on 6 April 2024, the 2024/2025 tax year. The 2022/2023 tax year is now known as the transitional year; the year we switch over from the current year basis to the new tax year basis.
To clarify, the “basis period” reform will only affect businesses not currently using the 31 March or 5 April as a year-end and does not affect limited companies.
If you currently have an accounting period which ends on any date between 31 March to 4 April HMRC will treat your accounting period as effectively ending on 5 April. This means that you do not need to follow any of the complicated rules under the transitional period and can prepare your accounts as normal for your year-end.
For example, if you have a year-end of 31 March, for the 2024/2025 tax year you should report your business profits earned in the period 1 April 2024 to 31 March 2025. This means any business income received and expenses incurred within the additional days in the 2024/2025 tax year, from 1 April 2025 to 5 April 2025 can be included in the 2025/2026 accounts and tax return.
However, the tax treatment for a business that do not have a year-end between 31 March and 5 April will be treated differently in the transitional period, and the 2023/2024 tax year. The transitional year rules which came in to force on 6 April 2023.
Unless you change your accounting period you may find yourself needing to prepare two sets of accounts to submit your tax return on a tax year basis from 2024/25, as well as paying income tax and self-employment national insurance contributions based on the profits for the HMRC tax year.
A financial year-end that is different to the HMRC tax year will likely necessitate the use of apportionment (and in some instances estimation) to calculate profits up to 5 April each year.
If you do not have an accounting date ending 5 April, the easiest route may be to change your accounting period to match the tax year as this will avoid apportioning accounting profits on your tax returns. It may be sensible to seriously consider changing the accounting period date to the 31 March, or 5 April as it would allow the accounts information to be completed more easily on the respective tax returns; and the obligation for reporting under Making Tax Digital for income tax (MTD ITSA) simpler for businesses when they fall into the new MTD ITSA regime which commences for some businesses on 6 April 2026.
To amend your accounting period (year-end) certain conditions need to be met. These are:
1) HMRC must be notified of the change in accounting period on your tax return that has been filed on time.
2) The change in accounting period cannot extend the accounts for a period longer than 18 months.
3) The accounting period must not have been previously changed in the last five previous tax years, or there should be a commercial reason for changing the accounting period which is also notified on the tax return.
If any of these conditions are not met, then the change of accounting period will not be recognised by HMRC. However, under “basis period reform” it is possible to change your accounting period within the 2023/24 tax year without having to meet the three conditions listed above in favour of the spreading rules. This does mean that you will have to follow the 2023/24 transitional rules which can be complicated depending on individual circumstances and sourcing help from a professional to assess this for you would be sensible.
For the die hard DIY’er, there is plenty of guidance available from gov.uk to get this right, simply search “Basis Period Reform”.
Not so die hard… If you are unsure how the “basis period reform” will affect you or what steps you should be taking, seriously, now is the time to seek professional advice, and JT AccountS are happy to help.
About This Article:
Please check the release date of this information, as Tax and Accounting Rules are ever changing. Feel free to get in contact if you have any questions, all of the JT AccountS® services are fully operations.
THIS NEWSLETTER TOPICS: Helping businesses tackle the current financial climate! – Director tax-efficient salary recommendations – The New Basis Period Reform – Voluntary National Insurance Contributions – Today not Tomorrow!
Director tax-efficient salary recommendations, when is comes to starting a limited company.
Voluntary National Insurance contributions can help make sure you have enough qualifying years to get the full State Pension. You need to make full contributions for a total of 35 years to obtain a full state pension.
Practice Number: 21331
Jacqueline Tetley is licensed and regulated by AAT under licence number 5096.