INDUSTRY NEWS • 20 SEPTEMBER 2023 • 3 MIN READ
Basis period reform: What it means for you
HMRC are implementing a basis period reform, changing the way trading income is allocated to tax years. These rules mostly affect sole traders, self-employed workers, and partnerships. In this article, we discuss what basis period form is, why these changes have been made, and what it means for you.
The basis period reform has simplified the rules regarding aligning an accounting year period with its relevant tax year period. These changes have been put in place to make the rules easier to understand, as well as eliminate any potential double taxation caused by overlapping profits. The goal here is to make tax reporting more straightforward and efficient.
Previously, the rules for matching the accounting year to the relevant tax year were quite tricky, particularly during the first or last accounting period, or when there were changes in partnership arrangements. These rules could cause profits to be taxed twice in different tax years, creating overlapped profits.
Starting from the 6th of April 2024, in the 2024/25 tax year, the basis period reform will come into effect. With these simpler rules, the figures you include in your tax return will be based on what happens in the tax year itself.
However, if your accounting year ends between the 31st of March and the 5th of April (otherwise known as a ‘co-terminus’ year-end) you will be unaffected by the changes.
The 2023/24 transitional year
The 2023/24 tax year, ending on the 5th of April 2024, is a transitional year. For this tax year, regardless of your accounting year-end date, you need to report all profits/losses up to the 5th of April 2024.
This may result in you being taxed on more than 12 months of profits. For example, if your accounting year normally ends on the 30th of April, you would be taxed on the profits for the accounting year ending on the 30th of April 2023, as well as the period between the 1st of May 2023 to the 5th of April 2024.
If you have overlapping profits to deduct, this could be good news. For example, you can bring forward losses from 2022/23.
The transitional year may not be so good, however, if you’re facing a larger-than-normal tax bill. To ease the burden, HMRC has agreed to automatically spread the additional tax transitional profits over 5 tax years from 2023/24 to 2027/28. However, you can elect to accelerate the tax on all or part of the additionally taxed profits.
Changes from the basis period reform
From the 6th of April 2024 to the 2024/25 tax year onwards, you must report any figures from the tax year on your self assessment tax return. In order to calculate your taxable profits and losses, you may need to separate the figures of the two accounting years that straddle the tax year. To make things easier, you may want to consider changing to accounting year-end to the 31st of March or the 5th of April.
Basis period reform could impact your tax returns from 2023/24 all the way to 2027/28. If you’re going to be affected by these changes, Beany can help you make the most of the new rules. Reach out to us today to get started.
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Kate Eastman
Senior accountant
Certified Chartered Accountant and Tax Adviser based in Surrey. I love cheese, chips, chocolate and coastal walks. I dislike horror movies, seafood and traffic jams.
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