Important update on basis period reform, if you are self-employed or a partnership preparing accounts other than 31 March or 5 April

New legislation taking effect in 2023/24 will affect non-corporate trading businesses that prepare accounts to a date other than 31 March or 5 April. The basis period reform is fairly straightforward in principle, in that all affected businesses will have to use the tax year as their basis period as of the 2024/5 tax year. However, for those that have different accounting periods—such as 1 January to 31 December—  2023/24 will  be used as a transition period to offset the likelihood that those affected will initially have a larger tax bill.

This is because the new rules will alter how the taxable profits of accounting periods are matched into tax years for the purposes of self-assessment profit reporting and income tax calculation.

At the moment, when reporting taxable profits for a tax year, it is necessary to report the taxable profits coming from the accounting period that ends in the tax year in question. For example, a sole trader preparing accounts to 30 June, would usually use the taxable profits from his/her year to 30 June 2021 as the basis of their 2021/22 income tax self-assessment.

From tax year 2024/25 onwards, a new ‘tax year basis of assessment’ will apply. This is not a requirement to prepare accounts to 5 April each year (although a business could choose to do so) but instead will require an apportionment of the tax adjusted results from each accounting period that overlaps into the tax year in question.

For example, a sole trader preparing accounts to 30 June will need to take the tax adjusted results for 30 June 2024 and 30 June 2025 and:

• Calculate 3 months (3/12ths) of the 30 June 2024 tax adjusted results; and
• Add 9 months (9/12ths) from the 30 June 2025 tax adjusted results, to create a tax adjusted profit/loss figure for the year to 5 April 2025.

The tax year 2023/24 will be a transitional year where, in addition to the accounting results that are brought into account under the current rules, a ‘transitional component’ will also be added in to ’stretch’ the reported taxable profits from the end of the usual accounting period used as the basis to 5 April 2024. If the individual is holding something called ‘overlap profits’, these are then deducted in full by way of ‘overlap relief’.

In an attempt at fairness, spreading rules will potentially spread any accelerated profits (and therefore accelerated tax payments) over five tax years, starting in 2023/24.

This is a complex change in the legislation and we will be advising our affected clients over the next few months. If you believe this development  will have an impact on you and your business and would like our advice, please get in touch.