Changes to basis period rules for the Self-employed

To prepare for Making tax digital for Income Tax Self-Assessment the basis period rules for businesses that are unincorporated will no longer stand. The basis period for the self-employed is the period of accounts that is taxed each year. Replacing this will be an assessment of profits for the tax year.

You will be affected if your business is unincorporated and you prepare accounts between dates other than between 31 March and 5 April.

The changes explained:

This measure changes the way trading income is allocated to tax years. Generally, businesses draw up annual accounts to the same date each year, called their ‘accounting date’. Currently, a business’s profit or loss for a tax year is usually the profit or loss for the year up to the accounting date in the tax year, called the ‘basis period’. Specific rules determine the basis period in certain cases, including during the early years of trading. These rules can create overlapping basis periods, which charge tax on profits twice and generate corresponding ‘overlap relief’ which is usually given on cessation of the business. Overall, this basis of taxation is called the ‘current year basis’.

This measure changes this to a ‘tax year basis’ with effect from the tax year 2024 to 2025, so that a business’s profit or loss for a tax year is 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. On transition to the tax year basis in the tax year 2023 to 24, all businesses’ basis periods will be aligned to the tax year and all outstanding overlap relief given.

Why is the change being made?

The reform aims to create a simpler, fairer and more transparent set of rules for the allocation of trading income to tax years. This reform will remove all existing requirements of the basis period rules such as double taxation of early years of trading profits and maintaining accurate records of overlap profits and relief, which are often lost and not utilised by taxpayers. At present, two businesses that are identical except for their accounting date may have very different taxable profits for a tax year. The tax year basis will remove this difference, leading to fairer outcomes between businesses.

Who will this affect?

The measure will affect self-employed traders, including individuals with a profession or vocation; partners in trading partnerships; other unincorporated entities with trading income, such as trading trusts and estates and non-resident companies with trading income charged to Income Tax. These groups are collectively referred to as ‘businesses’ in this document.

This measure will only affect businesses which draw up annual accounts to a date different to 31 March or 5 April (mainly seasonal businesses and large partnerships).

What should I do if I’m affected?

If you believe that you may be affected please get in touch with your Swindells’ partner who will be able to advise you further. You may wish to change your accounting date prior to the changes being implemented depending on your current profitability and expected levels of profitability.