What is the Basis Period Reform?
The basis period reform is a significant change in the way unincorporated businesses report their profits to HMRC via self-assessment. The changes will affect businesses who do not currently draw up accounts to 31 March or 5 April each year. Those businesses will start to pay tax on the profit between 6 April and 5 April each year, instead of the profit from the accounting period ending in the tax year.
There is a transitional period, which is the 2023/24 tax year where additional profits will have to be taxed to bring individuals in line with the tax year. From the 2024/25 tax year, all unincorporated businesses will report profit between 6 April to 5 April each year, regardless of their accounting year end.
You may wish to change your accounting year end to align to the tax year to avoid apportioning profits from two accounting periods each year.
Why is the Basis Period Reform being introduced?
HMRC are introducing the rules to align more accounting year ends with the tax year in a move towards a digital tax system. The reform aims to simplify and standardise the reporting of trading income for unincorporated businesses via self-assessment.
Who will be affected?
The reform will affect:
- Sole traders, partnerships and LLPs who do not currently have a 31 March to 5 April accounting period.
- Trading trusts and estates
- Businesses starting on or after 6 April 2024, as their profits will be taxed on a tax year basis each year
Sole traders and partnerships with a 31 March to 5 April accounting year-end will not be affected unless they have unused overlap relief.
The rules do not apply to limited companies.
How will businesses be affected?
For the 2023/24 transitional year, all unincorporated businesses will need to report the profit of their normal accounting year end, plus the profit to the 31 March 2024 or 5 April 2024.
The impact of this means extra profits could be taxable and due for payment to HMRC by 31 January 2025.
To help with cash flow, there are reliefs available to spread this extra profit (known as transitional profit) over 5 years after deducting any overlap relief available to you.
Overlap relief
Overlap profits can arise in the first few years of trading or following a change in accounting date, which are essentially profits which have been taxed twice. The overlap profits, known as overlap relief, must be offset during the 2023/24 transition year or they will be lost.
Transition period and key dates
- 2023/24 tax year: transition period for adjusting to the new rules
- 2024/25 tax year: new rules fully in effect, requiring all businesses to align their reporting with the tax year
Get in touch
If you have any questions on how to report overlap relief in your 2023/24 tax return, or have any questions about basis period reform, get in touch with the PM+M tax team by emailing enquiries@pmm.co.uk.
