Basis period reform: What you need to know

Basis period changes

You may have heard that HM Revenue & Customs are changing the basis period rules that are used when accounting for tax on business profits. These changes will affect any business that prepares its accounts to an annual accounting date other than 31 March or 5 April, and is therefore likely to affect you.

The existing arrangement is that accounting profits are taxed on the ‘current year’ basis, which means that if your accounts year ends on a date such as 30 June 2022, that year’s accounting profits will be taxed in the 2022/23 tax year.

The new rules will come into effect in the 2024/25 tax year and will tax the profits that you make in the tax year to 31 March or 5 April. This will be the case regardless of what date your accounts are made up to.

There are transitional rules that will apply in the 2023/24 tax year to make the change from the old basis to the new basis.

The tax implications

In the 2023/24 transitional year, you may be taxed on more than the usual 12 months of profits. For example, in the case of a trader who currently prepares accounts to 30 April, the transitional period will bring 23 months of profits into tax, from the end of the previous accounting period on 30 April 2022 round to 31 March (or 5 April) 2024. It may be that you have some ‘overlap relief’ from when you started in business to offset against these profits, and that is something we will look at when calculating your tax position.

In order to assess more specifically how these changes will affect your tax bills, we will need to discuss your circumstances with you and run some provisional calculations. For some people, there may be little effect on their tax payments, but it is likely that many people in self-employment or partnership will have a significantly larger tax bill in January 2025.  I would emphasise that this is not an additional tax charge, but a bringing forward of tax payments that would otherwise not have been paid until you ceased your business or changed your accounting year end.

What you may need to do

Although January 2025 may seem some way off, we are writing to you now because we want you to be aware of how the changes might affect you and so that you do not receive any unexpected surprises when the time comes that you haven’t prepared for. In summary, the changes could affect you in the following ways:

• You may need to consider changing the date that you prepare your accounting records to.
• You may need us to prepare two sets of accounts in order to prepare the 2023/24 tax return.
• You may need to provide us with your accounting records sooner than you have in the past.
• You may have some larger tax bills to pay.

This article can only provide you with a general outline, and we suggest that you contact us soon to have a discussion about the best way to prepare for the changes.