Important tax changes for the self-employed and partnerships
The basis period reform (BPR) relates to rules dictating when the trading profits of sole traders and partnerships subject to income tax are changing.
What is the Basis Period Reform (BPR)
The basis period is the period that you’re liable to pay tax based on your profit and loss. Your accounting period is the 12-month period you use for your financial reporting.
If your business uses the tax year as your accounting period, your accounting date would be 5 April and therefore both your basis period and accounting period are the same.
However, some businesses have a different accounting period to the tax year basis period and therefore their basis period and accounting period will be different.
The Basis Period Reform is a change to the way trading income is allocated to tax years for anyone whose annual accounting period is NOT the same as the tax year. For the purpose of the basis period reform, HMRC is allowing any accounting periods between 31 March and 5 April to be treated as a tax year.
All non-corporate businesses will be legally required to use between 31 March and 5 April as their basis period even if their accounting period is different.
Why is the reform being brought in?
The reform aims to create a simpler, fairer system to tie in with Making Tax Digital (MTD) for Income Tax.
Under Making Tax Digital for Income Tax, businesses will be required to submit quarterly reports in addition to an end-of-period statement and single final declaration. This could result in many reports being required for businesses not using the same basis period and accounting period. This could become complex and confusing resulting in mistakes and missed deadlines.
Under the basis period reform, reporting deadlines will be the same which be easier for businesses to comply with.
Who does the basis period reform apply to
The Basis Period Reform applies to all non-corporate businesses that do NOT have an accounting period which ends between March 31st and April 5th.
Non-corporate businesses include:
- Self-employed individuals
- Business Trusts
When does it come into effect
The BPR is due to come into effect in April 2024.
There is due to be a transition period starting in the 2023/24 tax year for those affected to have time to implement any necessary changes.
What are the basis period reform changes?
From April 2024, the existing basis period rules (the ‘current year basis’) will be abolished and replaced with a tax year basis of assessment. Under the new tax year basis, you will be subject to tax on your business profits arising in the tax year (12 months to 5th April), regardless of your accounting period end.
The tax year 2023/24 will act as a transitional year, in which we switch over from the current year basis to the new tax year basis. In this transitional year, your basis period will be made up of two different elements:
- A ‘standard part’ being the normal basis period (i.e. the 12 months to your normal year end); and
- A ‘transition part’ running from the end of the standard part to 5 April 2024
In effect, you will be required to bring into account an additional amount of profits running from the end of your normal basis period to the end of the 2023/24 tax year meaning it is possible your taxable profit will be much higher than normal in 2023/24. It will be important to plan for the effect this may have on your cash flow.
Two measures are allowed to reduce the impact of this:
- businesses can deduct any overlap relief they may have from the additional transition part profits; and
- any remaining transition profits (from the extra period created by this change) can then be spread over a period of up to five years.
What is overlap relief?
Overlap relief is created in a number of ways:
- In the first 3 years of trading due to the way profits are reported to HMRC when you have a non-5th April year end when your business starts, or
- When year ends are changed, or
- When self-assessment was introduced in 1996/97 if you were trading at that time
We will be able to advise you on how much is available to you.
How does the basis period reform affect me?
If your annual accounts are currently drawn up to a date from 31 March to 5 April, it will not affect you.
If you have accounting dates not within 31 March to 5 April allowed as a tax year under BPR, a new ‘tax year basis of assessment’ will apply. This means you may have additional tasks of estimating profits before your accounts are finalised and apportioning these profits into tax years.
The ICAEW site shows an example of estimating and allocating profits to tax years.
Should I change my year end to 5 April?
You may feel that a change of year-end will simplify your accounting systems but there is no obligation to do so. It may also not suit you to be dealing with your accounts at a different time of year.
What you will need to consider is the point at which you are able to calculate your taxable profit for the year to enter into your tax returns and to consider your tax liabilities so that you pay the correct amount.
For example, if your year-end is June 28th for the 2023/24 tax return you will need to have prepared both the years to June 2023 and 2024 to obtain the figures for the period to 5 April 2024 which falls in the second of these periods. The tax return filing date and tax payment date is 31 January 2025 so you need to be sure that you can provide 2024 accounts information in plenty of time to be able to complete this before the deadline.
It will mean dealing with your tax liabilities much later than normal (and in some instances 12 months later) and much closer to the actual payment date which gives you less time to plan for the payment.
If your year-end is early in the year you may feel that this will not be a problem.
If your year-end is late in the year this does not give you much time to prepare the second period of accounts before the deadline and it may not be possible to have finalised figures in that time.
What if my accounts are not ready in time?
The filing deadlines do not change and penalties will still be levied if your tax returns are late.
Estimates can be used on your tax returns but these will need amending once the final figures are available. This may mean that the tax you paid was not correct and you may have interest to pay if you did not pay enough at the right time.
We will also need to effectively do the calculations twice which will lead to extra fees.
Do I have to comply?
If the Basis Period Reform affects you, you do not have to change your accounting period, but your tax affairs may be more complicated if you do not do so.
Profits will need to be reported to HMRC during the tax year to HMRC but full accounts prepared and submitted on a different date. There may be some businesses that are unable to change their accounting date such as large international partnerships or seasonal businesses. If this applies to your business, speak to your accountant or tax advisor as your reporting could become quite complex.
What do I need to do?
Your Tax returns to 5 April 2023 will be unaffected. When your year end is due in 2023 (after 5th April) if you are affected by the new changes, you will either have to comply with the new rules or submit estimated profits before your accounts are finalised. Alternatively, you could decide to switch your accounting period to match the tax year if your business activities allow.
When does it come into effect?
The new basis period reform comes into effect from the 2024/2025 tax year. This is when you will be legally required to report your taxes based on the tax year not your accounting period.
There will be a transitional period in 2023/2024 where all businesses will have their basis period moved to the end of the tax year.
How to get more help with the basis period reform
The new Basis Period Reform can be complicated if your accounting period does not fall within the tax year of 31 March to 5 April. There may be a cash flow impact due to extra taxes due in the transition year along with the costs of complying with the new rules. We strongly recommend taking professional advice. If you would like Maynard Johns Chartered Accountants to help and advise you, get in contact with us today on 01237 472071.