News

The UK Government has confirmed that the basis period reform will go ahead as planned.

What does this mean?

The basis period reform means that from 2024/25, i.e. 6 April 2024 onwards, the profits and losses of sole traders and those in a partnership will be calculated based on the tax year itself, not the accounting period ending in the tax year, as is currently the case.

Who is affected?

Limited companies are unaffected by this new legislation, however these changes will affect all unincorporated businesses who do not have 31 March or 5 April as their accounting year end date.

Don’t be fooled into thinking that 2024/25 is a long time away and that you don’t need to consider anything now. The transition to the new rules

will actually take place during the current 2023/24 tax year and, depending on your year end, you could therefore see between 13 and 23 months’ worth of profit being taxed in a single tax year, which could significantly increase your tax liabilities.

Where additional profits arise as a result of complying with the transitional rules in the 2023/24 tax year, these can be spread over a five year period to assist with cash flow and potentially reduce the tax burden.

Should you change your year end?

The new rules do not actually require those affected to change their accounting year end; they simply change the way in which the profits are taxed and included on your annual Self Assessment tax returns.

If you do not change your year end, it may be necessary to submit your annual tax return to HM Revenue & Customs with estimated figures, as it may not be possible to prepare the required accounts by the tax return filing deadline. It will then be necessary to amend and refile the tax return once the accounts have been prepared.

Where estimated figures are used, this can lead to underpayments of tax which can result in interest charges arising and late payment surcharges being due.

Businesses with non 31 March or 5 April accounting year ends should therefore now consider whether it is beneficial to change their year ends and the following will play a part in making that decision:

• Reviewing the availability of overlap relief (profits that were taxed twice when the business started)
• Estimating the additional taxable profit and potential increased tax liability in the year of change and in the following years if spreading is adopted
• Taking into consideration any purchases of plant and machinery made since your last accounting date and any upcoming plans for further purchases, as these may result in a reduction in the taxable profits
• Thinking about any changes in your future personal income, such as reaching retirement age and being entitled to pensions
• Taking into account the potential cashflow implications of having to pay increased tax liabilities and whether this will require any additional funding

If advantageous, changing your accounting year end date, either in the 2022/23 or 2023/24 tax year, can result in an improved tax position and one which gives you certainty that when paying your Self Assessment tax bill that this is final and not estimated.

Our team of leading tax experts can help to determine the impact of the basis period reform on your business, including the preparation of projections and appropriate courses of action.

If you would like to discuss how we can help your business prepare for the Income Tax basis period reform, please get in touch.