Basis Period Reform: Everything you need to know
From the tax year 2024-25 onwards, owners of trading businesses will need to report the taxable profits of those businesses on a ‘tax year basis’ which means 1 April to 31 March each year (or 6 April to 5 April). Currently, businesses have to report the taxable results for the accounting period which ends in the tax year.
If you have a year-end of 30 September for example, in 2023-24 you will be assessed on the profits for the 18 months ended 31 March 2024 in order that 2024-25 is taxed on a tax year basis.
Who does the Basis Period Reform affect?
Self-employed individuals, partners in partnerships, or LLPs.
How will this affect you?
Income tax and National Insurance on your profits between your usual year-end and 31 March will be brought forward. However, there are transitional rules which relieve the tax pressure this may create.
Basis Period Reform – What are the options?
Option 1 – You may decide to change your year-end. This you can do early and prepare accounts up to 31 March 2023 or alternatively change it to 31 March 2024. If you do choose to go early to 2023, you may miss out on transitional relief.
Option 2 – You may retain your usual accounting date and bring in the profits earned since the year end up to 31 March on an apportioned basis. For example, using a 30 September year-end, in 2023-24 the self-assessment return for that year will require not only the 30 September 2023 accounts but also the 30 September 2024 accounts to be completed in order to get the correct apportioned profits to file the return by 31 January 2025.
Alternatively, the results can be estimated, though an amended return will need to be filed when the actual profits are known for that period. This can lead to interest on any underpaid tax and potential penalties if there has been an undue delay or significant underestimation. HMRC has said that it will relax its guidance to give businesses the normal amendment time limits to submit
Rules are being brought in to ensure that there is not a significant tax impact on businesses currently with a year-end which is not 31 March or 5 April.
These transitional rules apply to 2023-24 and allow the spreading of any additional profits over five years starting with 2023-24.
For example, a business changing its year-end to 31 March 2024 from a 30 September 2023 year-end can spread the additional profits falling with the period 1 October 2023 to 31 March 2024 over 5 years from 2024-25 onwards. However, taxpayers can also elect to recognise more of these transitional profits earlier if it is tax efficient to do so.
The transitional arrangements do not apply if you change your year-end to 31 March 2023.
If you have a year-end that is not 31 March or 5 April, you may have brought forward overlap profits. These are profits that have been effectively taxed twice due to HMRC’s rules on taxing opening years of businesses. If you have overlap profits, these will be relieved against your profits in the transitional year. We should have records if overlap profits exist, however, HMRC should be able to provide information on these if the information is missing.
Have a conversation early with your accountant to find out what this may mean for your business. Knowing the timing of Income Tax and National Insurance payments is key to cash flow and also can influence important investment decisions.
This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated with us.