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Basis Period Reform – What it is, when it is, who is affected, and what you need to do now

From 6th April 2024, unincorporated businesses who prepare their accounts to a date other than 31st March or 5th April must use the tax year as their basis period, regardless of their accounting period.

From 6th April 2024, unincorporated businesses who prepare their accounts to a date other than 31st March or 5th April must use the tax year as their basis period, regardless of their accounting period.

If you are the proprietor of an unincorporated business whose accounts are prepared to a date that isn’t 5th April or 31st March, you will need to decide whether you want to move your accounting period year end, or keep it the same.

Each decision will have ramifications on your tax due, cashflow and ongoing accounting processes.

Importantly for businesses affected, the transition will take effect in the tax year to 5th April 2024, starting on 6th April 2023.

Please note that basis period reform is different to Making Tax Digital for Income Tax and will affect all unincorporated businesses, even those not affected by MTD for Income Tax.

Sole Trader

Contents:

– What is the basis period reform?
– Who is affected?
– When does the change happen?
– Do you have to adjust your accounting period?
– Consider your cashflow
– Do you know your overlap profits?
– Working Example: Aligning your accounting period to the tax year
– Working Example: Having a separate accounting period to the tax year
– Need help? Contact Leonherman

What is the basis period reform?

Let’s start with the definitions: Your basis period is the time period for which you, a sole trader or partnership, will be charged tax each year.

Your accounting period is the time period covered by your business’s accounts.

To keep things simple, many unincorporated businesses already use the fiscal tax year (6th April – 5th April) as both their accounting and basis period.

However, some unincorporated businesses have accounting periods that don’t match the tax year.

From 6th April 2024, unincorporated businesses who prepare their accounts to a date other than 31st March or 5th April must use the tax year as their basis period, regardless of their accounting period.

Business profits will be calculated for the tax year rather than for the accounting period ending in the tax year.

Businesses that currently have different accounting periods (for example 1st January to 31st December) will use 2023/24 as a transition period, so their basis period will be longer than 12 months.

Who is affected?

These tax year basis changes apply to all unincorporated businesses who prepare their accounts to a date other than 31st March or 5th April, including:

  • Self-employed traders (sole traders)
  • Partners in trading partnerships
  • Other unincorporated entities with trading income, such as trading trusts and estates, and
  • Non-resident companies with trading income charged to Income Tax

Businesses already preparing accounts to 31st March or 5th April are not affected by the changes.

When does the change happen?

6th April 2023 to 5th April 2024 is the transitional year.

In this time, businesses who do not use the tax year as the basis period will have to move to the new tax year basis.

One option for affected businesses is to draw up full accounts for the full 12+ month period. But most businesses will draw up two sets of accounts, the first set to the end of the existing basis period and then transitional accounts drawn up to 31st March 2024.

Do you have to adjust your accounting period?

No. There’s no requirement to adjust your accounting period for the basis period reform.

Business owners have a choice.

They can choose to align their accounting date with the tax year, or they can continue to have a separate accounting period to the tax year basis period.

BUT businesses will still be expected to report for the 6th April – 5th April tax year for trading purposes, whatever choice they take.

For businesses who choose not to align with the tax year, this means that there will always need to be an estimate of the profits of the later period with a subsequent amendment once the final figures are known (see example below).

That’s why, for simplicity, many businesses will want to consider aligning their accounting date with the tax year, and we would be happy to advise you of the tax consequences.

Consider your cashflow

Pound Coins

It’s important to note that some businesses who choose to align their accounting period to the tax year basis could find that they have almost two years’ worth of profits (23 months in the case of 30th April accounting year-ends) being taxed in the 2023/24 tax year.

This could create a significant tax bill for some businesses in 2023/24 although the tax due can be spread into payments over 5 years.

We strongly urge you to consider the cashflow implications of any transition.

If you can supply us with estimated figures, we will work with you to calculate the impact on your cash flow and help you to make the best-informed decision.

Do you know your overlap profits?

If you do choose to change your accounting year end, you will need to know what your overlap profits are.

For businesses which were set up many years ago, this information might not be to hand.

If your overlap profits aren’t already reported on your tax return as ‘brought forward’ amounts, then you would need to contact HMRC to find out what your overlap profits are, which could take some time, so forward planning is essential.

Working Example: Aligning your accounting period to the tax year

Electrician at work

Joe Bloggs runs an electrician business as a sole trader.

He set up his business on 1st September 2015 and decided he would run his accounting period from that date. This means he generated seven months of overlap profits in his first year.

Under basis period reform, Joe can either switch his accounting period to align with the tax year (so his basis and accounting period match) or carry on using his existing accounting period.

Joe decides to change his accounting period to match up with the tax year basis.

Profits for his accounting year 31st August 2023 will extend by seven months to take him to 31st March 2024. As a result, he has an additional seven months of profit in the basis period for that year.

However, Joe also has seven months of overlap profits from when he established his business that need to be deducted.

What’s left is the ‘transitional amount’.

Joe can either pay the tax due on the transitional amount spread out over the next five years, he can spread out the tax due over fewer years or he can pay the whole tax due immediately.

Whichever decision Joe takes will likely depend on his cashflow situation and his tax implications.

Working Example: Having a separate accounting period to the tax year

Person checking their National Insurance record

Joanna Smith is a sole trader who runs a copywriting business.

She currently makes up her accounts to 31st May annually and wants to continue to do so.

Under the new tax year basis, her business will need to report for the 12 months to 31st March 2025.

So, its 2024/25 profits would be calculated as:

  • 2/12ths of its profits (or losses) for the period of account to 31st May 2024, PLUS
  • 10/12ths of its profits (or losses) for the period of account to 31st May 2025.

However, if Joanna’s accounts to 31st May 2025 have not been finalised, then these 10 months’ profits will need to be estimated to submit the 2024/25 tax return, which will then need to be amended once the final figures are known.

Need help? Contact Leonherman

Rest assured that all our clients who will be affected by this change will be contacted separately.

If you’re not a client of Leonherman but are concerned about whether these changes might affect you or how they might affect you, particularly with regards to your cashflow, please don’t hesitate to get in touch with our expert accounting team today and we would be happy to advise you.

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