Insights

This affects those who are self-employed or are partners in a partnership or LLP.

Basis period reform was introduced in the 2021 Autumn Budget and is intended to simplify tax accounting for unincorporated businesses. (Note that it also brings forward the date on which tax is payable, arguably also the intention).

For the 2024/25 tax year, all affected businesses will need to prepare their business tax return for the period from April 2024 to April 2025 (although note HMRC will accept 1 April 2024 to 31 March 2025). This will be the case irrespective of the accounting period used by the business.

The 2023/24 tax year will be a transitional year, during which businesses will be taxed on:

• The profits arising in their accounting year; plus
• The profits arising from the end of their accounting year to 31 March (or 6 April) 2024; less
• All overlap relief previously accrued by the business.

Many businesses already have a 31 March accounting year end, and they will not be affected. However those businesses having a different year end will be taxed on additional profits to bring them into line with those having a 31 March year end. This will of course have the financial implication of a higher tax bill for 2023/24. Given the current economic climate, this could be problematic, so HMRC is offering an automatic transitional relief which can be opted out of by election.

There are of course a number of issues arising from this change, including:

• Additional tax which will become payable on 31 January and 31 July 2025 as a result of the additional profits arising in 2023/24;
• Whether to opt out of the transitional relief, if, for example, you consider the tax rate will increase, or business profits will increase into an additional tax rate band in future years;
• Whether to change the accounting year of the business to simplify things on an ongoing basis.

It should also be noted that the additional income chargeable to tax as a result of these rules:

1. Will count towards total income when calculating the amount of personal allowance available; and
2. Will not count towards total income when calculating the amount of pension contributions that can be made.

Key dates for basis period reform planning

• 2022/23: Final year of existing basis period rules which specify that profits of the accounting year ending within the tax year form the basis of the taxable amount;
• 2023/24: Transitional year where businesses must synchronise their financial year with the tax year;
• 2024/25: Mandatory basis reform begins - businesses must adopt the same financial year as the tax year and declare taxable profits for this year only.

Example – How does basis period reform affect your business?

Clarys Jones runs a beauty salon as a sole trader which she commenced on 1 September 2016. As a result, when she started trading she accrued 7 months of overlap relief (i.e. profits that were taxed twice in both 2016/17 and 2017/18) .

To comply with the basis reform rules, Clarys can either continue using the 1 September to 31 August accounting year or she can simplify things by switching her year end to 31 March to match her accounting year with the tax year.

In 2023/24 she will be taxed on profits of the year to 31 August 2023 and profits of the period from 1 September 2023 to 31 March 2024. This will be the case whether or not she changes her accounting year.

Clarys will deduct from the additional profits the overlap relief which arose when the business was established, and the remaining additional amount will be the ‘transitional amount’. The transitional amount will be taxed equally (20% per tax year) over 5 years from 2023/24 to 2027/28 inclusive. If Clarys makes an election to opt out of the transitional relief, the transitional amount will be taxed wholly in the 2023/24  tax year.

If Clarys makes losses due to excess overlap relief, she can carry these losses back 3 years.

If you would like more specific advice about basis period reform please contact us via partners@rjp.co.uk.