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Callie's Corner: What is Basis Period Reform and how will it affect me?

Introducing "Callie's Corner: Insights on Tax and Finance"!

In this series, our accountant, Callie, shares her knowledge and expertise on various topics related to tax, finance, and accounting. Today, Callie dives into the intricacies of Basis Period Reform, shedding light on what it means for businesses and individuals alike...

What is a basis period?

A basis period refers to the time interval used to calculate profits and income tax for a business for a particular tax year. Currently, income tax is calculated based on the 12- month accounting period that ends within the tax year. For example, if your business’ year- end date is 31 July, your taxable profits would be calculated from 1 August 2021 to the following 31 July 2022 for the 2022/23 tax year.

However, the rules are changing from the 2023/24 tax year so that all unincorporated businesses will use the UK tax year of 6 April to 5 April as their basis period. So, this change will affect you if you do not have an accounting period ending between 31 March and 5 April. This change is known as business period reform.

What is basis period reform?

With basis period reform being implemented, this will mean that sole traders and partnerships will need to use the tax year (6 April to 5 April) to calculate their profits or losses to be included on their self- assessment tax returns. The change will be put into place for the 2024/25 tax year with transitional rules applying in the year 2023/24. Different accounting dates that do not align with the tax year can still be used, but the businesses that choose to do this will need to calculate their taxable profits by apportionment.

Who will be affected?

The change that basis period reform will bring will affect:

  • Self- employed traders
  • Partnerships (including limited liability partnerships)
  • Other unincorporated entities with trading income

If you have an accounting period ending 5 April or between 31 March and 4 April, the basis period reform will not affect you, unless you have unused overlap profits.

If you have an accounting period ending between 6 April and 30 March, the reform will affect you and you will need to alter the way you calculate your taxable profits from the 2024/24 year onwards.

Transitional rules applying in 2023/24

The transitional period rules will result in some taxpayers having to report profits for more than a 12- month period on their 2023/24 tax return. The transitional tax year of 2023/24, will be the period where all of the businesses affected by the basis period reform, will need to adjust their taxable profits or losses to line up with the new tax year basis.

This will mean that affected businesses will be taxed on the profits for the 12-month accounting period that have previously been using and for the rest of the 2023/24 tax year. Any excess profit covering more than 12 months is known as ‘transition profit’. This can be reduced by overlap relief and the remaining profit will be spread over the next five tax years until 2027/28.

Can you change your accounting date?

It is possible for your accounting period to be changed within the 2023/24 tax year. HMRC may send you a letter in the post, prompting you to change your year- end date, however if you do not receive one you can still change it. But this does mean that the 2023/24 transition rules will have to be followed which can lead to complications for certain individuals. National insurance may vary as it is threshold and turnover based and it may impact some individuals being able to claim certain benefits.

What is the reason for basis period reform?

A simpler, fairer and more transparent set of rules is the aim of basis period reform. Existing requirements such as double taxation of early years of trading profits and keeping records of overlap profits will be removed by the reform.

The ‘fairer’ aspect arises from the fact that currently, two businesses that have the same nature or ways of operating may have very different taxable profits for the same tax year due to their different accounting periods and basis period reform will remove this difference.

The tax year basis will align trading income with other forms or income included on a tax return such as property income and interest. The change will also make it easier for businesses to save for their tax obligations by bringing the payment of tax closer to the time that profits are earned.

Please get in touch if you think your business will be affected by the basis period reform and would like to discuss the changes you need to implement.