Basis Period Reform Guidance: What You Need to Know
The tax landscape is constantly evolving, making it essential for businesses and individuals to stay informed about upcoming changes that could impact their financial affairs. One noteworthy change is HMRC’s Basis Period Reform, which changes how the trading profits of unincorporated businesses, including sole traders and partnerships, are calculated for income tax purposes (it does not affect limited companies).
In this blog, our team of expert tax advisers and chartered accountants in Walsall will provide the information you need to know about the reforms.
What is the Basis Period Reform?
The Basis Period Reform is the new system which taxes businesses on the profits arising in each tax year, irrespective of their accounting period end date. This significant shift separates the accounting period chosen by a business from the period they are taxed on their profits.
When does the Basis Period Reform start?
The change has already come into effect. From 6th April 2024, the traditional method of calculating trading profits, previously known as the ‘current year basis, was replaced by the new ‘tax year basis’.
Who do the reforms affect?
HMRC’s basis period reform will only impact trading businesses subject to income tax, such as sole traders and individuals in partnerships.
Partnerships will continue to file returns based on the partnership’s accounting period, while individual partners will adapt to the tax year basis for their self-assessment returns. Companies will remain unaffected and continue to follow corporation tax rules.
Businesses with accounting periods ending on 31st March or 5th April will see minimal changes, as these dates are treated the same for tax year purposes.
Calculating profits under the ‘Tax Year Basis’
Businesses with accounting periods that do not end on 31st March or 5th April will need to calculate their profits for every tax year from 2024/25.
It involves splitting profits from two sets of accounts, based on the number of days falling within the tax year. This should reflect the tax-adjusted profit/loss, after accounting for non-deductible expenses and capital allowances.
If you have a December year end, where your yearly accounts would end of 31st December 2025, you would not be expected to file your 2024/25 financial accounts by the deadline on 31st January 2026.
Instead, you would be required to include in your tax return an estimate of the figure for the second set of accounts. However, this would need to be as accurate as possible, or interest or penalties could apply. That provisional figure/estimate will subsequently need to be corrected by amending the original return.
2023/24 will serve as a transitional year
The tax year 2023/24 serves as the Basis Period Reform’s transitional year, during which profits are calculated using a combination of the ‘standard part’ and the ‘transition part.’
The standard part consists of profits for the 12 months ending with the basis period for 2022/23, while the transition part covers the period from the end of the standard part to 5th April 2024. As a result, more than 12 months of profit could be taxed.
Overlap relief is available to help mitigate the impact of double taxation on profits. Businesses must fully utilise available overlap relief in 2023/24. Spreading allows businesses to spread additional profit over five years, easing the tax burden.
Get expert advice from the tax professionals at Edwards.
As a trusted accounting company in Walsall, we can provide tailored advice to help you navigate the basis period reform effectively.
From guidance on the practicalities of changing your accounting dates to ensuring considerations for alignment with Making Tax Digital for Income Tax Self-Assessment, and how the basis period reform interacts with other tax elements, we can help you stay informed, plan, and ensure compliance with the evolving tax landscape for a smoother financial journey.
Speak with a tax expert today to find out what we can do to help you.
