Will the Basis Period Reform Affect Your Clients?

HMRC’s basis period reform, applicable from the 2023/24 tax year onwards, could affect businesses that pays tax via Self Assessment, and could also impact trading trusts and estates and non-resident companies with trading income that’s subject to income tax.

HMRC says the basis period reform is being introduced “to create a simpler, fairer and more transparent set of rules for allocating trading income to tax years”. Currently, as it explains, “two businesses that are identical except for their accounting date may have very different taxable profits for a tax year”. The reform to tax year basis will remove this difference, leading to fairer outcomes between businesses, the tax authority has stated.

The basis period reform won’t affect all sole traders and ordinary partnerships members, just those that draw up annual accounts to a date that isn’t between 31 March and 5 April (which HMRC describes as “mainly seasonal businesses and large partnerships”).

The basis period reform will also affect businesses started on or after 6 April 2024, from which date profits will be taxed in the tax year in which they arise.

Sole traders and members of ordinary partnerships with a 31 March-5 April accounting year-end will not be affected by the basis period reform – unless they have unused overlap relief.

Overlap relief can be used to reduce taxable business profits. Overlap relief is based on ‘overlap profits’, which can arise if a business has not always used an accounting-period end that falls between 31 March and 5 April.

Overlap profits can arise in the first two or three years of a business or in any year during which there is a change of accounting date.

The introduction of the basis period reform means all sole traders and ordinary partnership members will need to report their business tax information to HMRC on a tax-year basis (i.e. 6 April until the following 5 April), regardless of what their accounting period is.

This will mean that some sole traders and ordinary partnership members will need to change how they report their profits to HMRC for tax purposes for the 2023/24 tax year and subsequent tax years.

The new rules will mean that from 2024/25, all unincorporated businesses will be taxed on income generated between the start and end of the UK tax year (i.e. 6 April to 5 April). This will be the case, regardless of the year-end to which the business prepares its accounts.