What is basis period reform? What does it mean for you?
How will the change of basis period for income tax affect you?
You may have heard about basis period reform, but what does it mean and how will it impact you?
For those clients who want to study the new reform in depth, we’ve put together a detailed guide to the change of basis period. However, we acknowledge that many of our clients simply want to know what – if anything – they need to do, in light of this change.
In this article, we’ll answer some of the most frequently asked questions – including ‘what is basis period reform?’ – in order to understand how this tax change might affect your business.
What is the current year basis?
As you will know, businesses are required to compile annual accounts to the same date each year – this is their ‘accounting date’.
The existing system is known as ‘current year basis’. Currently, a business’s profit for a tax year runs for the 12 months, up to its accounting date within that given tax year. This is called the ‘basis period’.
In the tax year 6th April 2022 to 5th April 2023, the basis period of a business with a July year-end was the 12 months to 31st July 2022; whereas the basis period of a business with a March year-end was the 12 months up to 31st March 2023.
Under this framework, there is a variable amount of time between when profit is earned and when the payable tax is assessed.
What is basis period reform and when does it begin?
The new rules for income tax will be introduced from 5th April 2024. From that date, businesses will be taxed on the profits amassed during the tax year – NOT the basis period.
This means that, for the tax year 2024/25, the tax liability will be on profit made between 6th April 2024 and 5th April 2025, regardless of the business’s accounting date. If a business does not have a 5th April accounting date, tax will be based on two separate sets of accounts:
A business has an accounting date of 31st December, so the assessment for 2024/25 would be:
- approx. nine months’ worth of profits from 6th April 2024 to 31st December 2024
- plus three months’ worth of profits from 1st January 2025 to 5th April 2025
The purpose of basis period change is to tax profits in alignment with the tax year, rather than the profits for the 12 months to the business’s accounting date in that tax year. HMRC maintains that this will:
- make it easier for businesses to save for their tax obligations
- improve compliance
- reduce tax debt write-off
- with the payment of tax closer to the time profits were earned, it also makes the income tax system more responsive
Who will be impacted by basis period reform?
The following unincorporated businesses are likely to be affected by the change of basis period, if their accounting date is not aligned to the tax year:
- self-employed sole traders
- partners in trading partnerships, including limited liability partnerships (LLPs)
- trading trusts and estates
- non-resident companies with trading income charged to income tax
The changes will not affect you if your accounting year-end falls between 31st March and 5th April, as this will be treated as aligned to the tax year.
If you operate your business through a limited company and you are a director, these changes will not affect you.
When is the basis period reform transitional year?
The tax year 2023/24 will be the transitional year which will bring about the changes in preparation for the new basis to be operational from 5th April 2024.
During the tax year to 5th April 2024, businesses with an accounting year-end date that is not aligned with the tax year will be required to calculate their transitional profits and apply the transitional rules. Transitional profits will be divided evenly across 5 years from 2023/24 onwards.
What are the impacts of basis period reform?
Potential impacts for your business might include:
- being required to assess and finalise your profits more rapidly – therefore may be necessary to file provisional figures and revise the return at a later date once the true figures are known
- having substantially higher tax bills for the current tax year (2023/24) and the following four tax years. This is due to changes in the way that taxable business profits will be calculated for a tax year
- seeing more profits taxed in the 2023/24 tax year than would otherwise be the case
- bringing forward the tax payment date for profits has the potential to push you into higher tax rates
What can be done about the basis period change of accounting date?
The changes have been justified as a way to simplify things in the longer term but, in some cases, they create complex issues for individuals and partnerships.
In theory, we could sidestep issues by changing your business’s accounting year to align with the tax year. This will simplify the transitional calculations and reporting of annual profits. However, in practice, there may be other tax considerations that make this unfeasible. In these cases, businesses will need to consider submitting provisional tax returns until final accounts are prepared.
How can we help you adjust to the change of basis period?
It’s important that business owners are able to understand the implications of these changes. Be assured that we are here to help you with adjusting to the change of basis period.
Please contact us, for more advice on the transitional calculation and how – together – we can look at reliefs to help ease the tax burden of these changes: