{"id":19898,"date":"2023-11-15T16:15:13","date_gmt":"2023-11-15T16:15:13","guid":{"rendered":"https:\/\/www.evangatefs.com\/?p=19898"},"modified":"2023-11-15T16:16:20","modified_gmt":"2023-11-15T16:16:20","slug":"basis-period-reform","status":"publish","type":"post","link":"https:\/\/www.evangatefs.com\/basis-period-reform\/","title":{"rendered":"Basis Period Reform 2023\/2024"},"content":{"rendered":"\n

Who Is Affected By The Reform<\/h2>\n\n\n\n

Basis period reform will align the tax reporting periods for all self-employed individuals (sole traders)<\/strong>, limited liability partnerships<\/strong> (LLPs) and unincorporated entities<\/strong> to the HMRC tax year. This means they will need to report their business income and expenses (trading profits) to HMRC based on the tax year dates of 6th April to 5th April.<\/p>\n\n\n\n

If your accounting year-end dates are already aligned with the tax year, that is, from 31st March to 5th April (inclusive), then you will not be affected.<\/p>\n\n\n\n

Previously, the basis period rules allowed for reporting based on individual accounting periods, but the reform removes this option so that everyone reports on the same tax year basis. The transitional period for those affected kicks in from 6 April 2023.<\/p>\n\n\n\n

Current Year Basis Period Pitfalls<\/h2>\n\n\n\n

Before we address the reform changes, let’s look at the pitfalls of the current basis period. The previous basis period rules link tax reporting to a business’s accounting period end date. This led to overlapping basis periods where profits got taxed twice<\/strong>, requiring complex “overlap relief” to fix the double taxation<\/strong>.<\/p>\n\n\n\n

For example, under the current rules, a business’s taxable profit for a year is based on its accounting period ending in that tax year. Considering the scenario where a business with accounts ending 31st December, it would base its 2020\/21 tax return on its accounts for the 12 months to 31st December 2020. This is the “current year basis”, where the accounting period determines the “basis period” for taxation.<\/p>\n\n\n\n

If a business started on 1st January 2020 with 31st December accounts, its 2019\/20 return would be based on 26.03% (95 days\/365 days) of the profits in its accounts to 31st December 2020. Its 2020\/21 return would be based on the full 2020 calendar year profit. So, part of the profit is taxed twice before the normal system applies.<\/p>\n\n\n\n

NB. Special apportionment rules apply to avoid double taxation in the first and last years of trading.<\/p>\n\n\n\n

The basis period reform will simplify this by making tax reporting follow the tax year regardless of a business’s accounting date. This change will remove the possibility of overlapping basis periods<\/strong> and eliminate the need for overlap relief. Business profit or loss will be matched directly to the tax year it arises in, with the aim of streamlining compliance.<\/p>\n\n\n\n

HM Revenue & Customs published a policy paper<\/span><\/a> explaining why the BPR came about.<\/p>\n\n\n\n

New Tax Year Basis (from 2024\/25)<\/h2>\n\n\n\n

Under the reformed rules starting in 2024\/25, taxable profit will be calculated based on the portion of the accounting period falling within the tax year. For a business with their accounts ending 31st December, their 2024\/25 return would include 270\/366 (73.77%) of their 2024 calendar year profit, plus 95\/365 (26.03%) of their 2025 calendar year profit.<\/p>\n\n\n\n

Businesses (sole traders, LLPs, etc.) with year-ends not aligned with the new tax year will need to be careful if their year-end accounts have not been finalised before the deadline for filing tax returns – as they will have to include estimated\/provisional figures in the return<\/strong>. These will then need to be amended in the next return once the actual profits (or losses) have been calculated.<\/p>\n\n\n\n

This could become somewhat of a headache every year.<\/p>\n\n\n\n

Transitional Phase To Tax Year Basis<\/h2>\n\n\n\n

Since those who will be affected currently do not have accounting periods ending on 5th April, the 2023\/24 tax year will be a transitional phase over to the new tax basis. This could result in some sole traders or LLPs reporting profits for more than 12 months on their 2023\/24 return.<\/p>\n\n\n\n

Unfortunately, this means that reporting profits for an extended period (longer than 12 months) may lead to additional tax owed.<\/p>\n\n\n\n

Fortunately, the payment of any tax burden from profits produced during the transitional period can, under certain circumstances, be spread out over a period of five tax years, beginning with the year in which the transition takes place.<\/p>\n\n\n\n

This should help improve cash flow by ensuring that the additional tax owed on these gains is not paid in whole during the tax year of 2023\u201324.<\/p>\n\n\n\n

Should you change your year end to 31st March?<\/h2>\n\n\n\n

Deciding whether to change your accounting year end to 31st March to align with the basis period reform requires some consideration. On the one hand, moving your year-end will help simplify the transition in 2023\/24 and align you to the tax year for the future<\/strong>.<\/p>\n\n\n\n

However, there are a few potential downsides to keep in mind.<\/p>\n\n\n\n

Changing your accounting year-end can be a disruptive process involving adjusting accounting systems, contracts, reporting schedules, and other business processes. This will likely create some extra administrative burden in the short term.<\/p>\n\n\n\n

Also, depending on your profitability, changing year end could concentrate more income into the 2023\/24 transitional year. This could temporarily increase your tax liability compared to the current year rules. As mentioned above, this might mean you have to spread that tax burden over the next few years.<\/p>\n\n\n\n

That said, if your business has a straightforward accounting process<\/strong>, aligning your year-end to the tax year may simplify compliance under the new rules. No longer needing to apportion profits between years or file amended returns could offset some of the transition headaches and costs.<\/p>\n\n\n\n

For clarity, if you have a year-end which falls on 31st March, 1st, 2nd, 3rd or 4th April, it will automatically be considered as having a year-end on 5th April (i.e. ending on the tax year) – so you will not be affected.<\/p>\n\n\n\n

Rules For Changing Year End To 31st Match – 5th April<\/h2>\n\n\n\n

Those who are affected can change their accounting period before basis period reform kicks in, but certain requirements must be met:<\/p>\n\n\n\n