How will Basis Period Reform impact my business?

02/10/2023.
From the tax year 2023/24 the way HMRC tax self-employed and partnership profits will change. This change does not affect those in business with an accounting year ending between 31 March and 5 April.

Going forward you will be taxed on the profits made (arising or accruing) during the tax year and not the profits made during your accounting year ending in the tax year. 2023/24 is the transition year.

For example, for a 30 November 2023 year end:

Previously you would have been taxed on the profit for the accounting year ending in the tax year. In this example November 2023 falls within the tax year 2023/24.

To bring this up to date for the 2023/24 tax year you will be charged tax on the profit for the year to 30 November 2023 and for the period from 1 December to 31 March 2024 – an additional 4 months. You may be carrying overlap relief created when you first started trading but that will have been calculated on an individual basis at the time so will vary for different individuals.

For future years your profit will be assessed on the profits arising in your business between 6 April and 5 April (though there is some flexibility for those whose accounting date is between 31 March and 5 April).

As a result, there will potentially be an extra tax burden for the 2023/24 tax year, payable on 31 January 2025. It will be important to find out what overlap relief you have available that can be used to reduce the taxable profit for the 2023/24 tax year.

There are transitional rules allowing the addition tax (the tax on the 4 months in this example) to be spread equally over 5 tax years (2023/24 – 2027/28).

If you are caught by this change it may be advisable to consider changing your accounting year end to 31 March to match with these new rules. You could leave your accounting year as it is but, to complete your future tax returns you will need to use a proportion of the profits from two accounting years. That may accelerate the need to complete the following year’s accounts much earlier than might otherwise be the case. The alternative is that you estimate the profits for the following year and then make an amendment to cover any under or overestimate once the financial statements for the next year are finalised. This will cause additional administrative work and compliance cost and should the profits have been underestimated HMRC will charge interest on any difference in the tax liability.

Get in touch

This will affect those in self-employed businesses or partnerships in different ways depending on your current accounting year end so please get in touch with your usual contact for more tailored guidance.

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