Basis Period Reform

Basis Period Reform – who will be affected?

The tax changes will affect self-employed individuals, partners in trading partnerships (including LLPs) as well as other unincorporated entities with trading income such as trading trusts and estates.

For the purpose of this post these groups are collectively referred to as ‘businesses’.

This measure will only affect businesses that draw up annual accounts to a date different from 31 March or 5 April and businesses that commence from 6 April 2024.  UK resident companies are not affected.

What is the general description of the Basis Period Reform measure?

The tax changes will alter the way trading income is allocated to tax years.

Currently, a business’ profit or loss for a tax year is usually the profit or loss for period up to the accounting date in the tax year, called the ‘basis period.’

For example, if you produce accounts for the year ended 30 June, then the profits to 30 June 2022 will be reported on the 2022/23 tax return.

The new tax year basis will take effect from the 2024 to 2025 tax year, and a business’s profit or loss for a tax year will be the profit or loss arising in the tax year itself, regardless of its accounting date.

This removes the basis period rules and prevents the creation of further overlap relief.

Basis Period Reform what are the detailed proposals?

The reform will take effect for the 2024 to 2025 tax year with a transition year in the 2023 to 2024 tax year.

The legislation will remove the references to basis periods and provide for the profits of a tax year to be the profits arising in that year, in the same way as property and other income.

Businesses with accounting dates between 31 March to 5 April will not be affected.

In the 2023/24 tax year all businesses will have to report to their normal accounting date plus the profits arising to the 5 April 2024.

For example, if a business has a 30 June accounting period, then in the 2023/24 tax year that business would report a years’ worth of profits to 30 June 2023, plus the profits arising in the period 1 July 2023 to 5 April 2024.

What is the impact of Basis Period Reform?

The result is that any business that does not already report to 31 March/5 April could have significant additional profit liable to tax in 2023/24.

Any overlap profits which arose in the opening years of trading will be deductible in 2023/24.

Any remaining profit which relates to the additional period (1 July 2023 – 5 April 2024 in the example above) can be spread over 5 years (2023/24 and subsequent four years).

LLPs will still need to report their accounts to Companies House to the same ongoing accounting date. It is possible to change accounting date at Companies House to coincide with the 5 April/31 March.

If LLPs maintain their current accounting periods, then an apportionment will be required to fit into the tax year. For example, with a 30 June accounting period, in 2024/25 the profits to be reported would be calculated as 3/12ths of the period to 30

June 2024 plus 9/12ths of the period to 30 June 2025.

The resultant profit will need to be reported to HMRC by 31 January 2026. Therefore, an estimate of the 30 June 2025 profits would be required.

If you have any questions about the basis period reform and how this might impact upon you and your business, please do not hesitate to contact us on 020 7870 9050. A member of our tax team is waiting to assist you.  Alternatively you might find the HMRC website helpful.

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