You may have read about HMRC’s ‘basis period reform’ that has brought in new rules to change the way self-employed profits are taxed. If your self-employed or partnership business has a year end other than 31 March or 5 April, these changes will have an impact on you and, although they do not come into effect fully until 2024/25, 2023/24 is a transition year.

What is a basis period?

The basis period is the period of accounts on which your tax is calculated in any tax year. In the past, with the exception of the first and last years of a business, this has been the normal accounting period of the business. To look at what has changed, we need to review the old rules and then consider the changes brought in by the new rules.

The old rules

For many years sole traders and partnerships have been taxed on the profits arising in the accounting year that ends within the tax year. For example, the profits for the year ended 30/6/22 were taxed in the 2022/23 tax year.

The new rules

From 2024/25, regardless of the business year end, all sole traders and partnerships will be taxed on the profits arising in the tax year – i.e. 6 April one year to 5 April the next (for these purposes HMRC will accept 31 March year ends as well). 2023/24 was a transition year with separate rules to bring the changes into place.

The impact

There are two main implications:

• • Businesses can either:
    – choose to keep the same year end and apportion profits between tax years, or
    – change the year end
    In practical terms most businesses will amend their year ends as it is administratively easier.
  • There will be some months that are taxed twice in the transition period. There may be some relief against this “double taxation” (more below).

Overlap profits and relief against “double taxation”

Some businesses will have what are known as overlap profits from when the business first started trading. These can be deducted from the additional months that are now being taxed as a result of basis period reform, reducing the additional tax liability.

Transitional rules

HMRC acknowledge that the additional tax arising from aligning profits to the tax year will be a burden for taxpayers, and are allowing the transition profits to be spread over 5 years.

If you think basis period reform might affect you and you would like more information, please get in touch.