In the world of taxes and accounting, changes can be quite frequent, and staying updated is crucial for individuals and businesses alike. The Basis Period Reform has been described as the biggest change in the tax system since self-assessment was introduced. Whether you’re a sole trader, a partner in a business, or simply someone interested in understanding the financial landscape, this reform holds importance.

In this blog, we’ll delve into the basis period reform, exploring its implications and what it means for you.

What is the Basis Period Reform?

Under the previous system, if your business’s fiscal year ended on, say, September 30, 2021, the profits from that year would be reported on your tax return for April 5, 2022. This is known as a current year basis.

The reform, on the other hand, mandates that profits should be reported for the exact fiscal year in question, except for businesses with a year-end on March 31, which is still considered coterminous with April 5. This is known as an actual year basis.

Which Businesses Are Affected by the Reform?

The Basis Period Reform exclusively affects sole traders and partnerships who don’t already have a 5th April or 31st March year end. This change does not apply to limited companies, charities, clubs, associations, and similar entities.

What impact will the Basis Period Reform have on my business?

The Basis Period Reform effectively accelerates tax charges and in the first year of transition more than twelve months profits will be reported on one years tax return. For example;

A 30 September 2024 year end would report twelve months profits to 30 September 2023 (current year basis) and then a further six months profit to 31 March 2025 to convert to the actual year basis. Eighteen months profits on one return.

When Does the Basis Period Reform Take Effect?

The Basis Period Reform becomes effective on 6 April 2024. Therefore, the first period to be reported on an actual basis is the 2024/25 tax year.

What Transitional Arrangements Has the Government Provided?

To facilitate the transition, the government has introduced a transitional year, which is the 2023/24 tax year.

During the transition year excess profits created by Basis Period Reform can be spread over the following five tax years, This is only available during the 2023/24 tax year.

Do I Have to Transition in 2023/24?

No, transitioning is not obligatory in the 2023/24 tax year. You have the flexibility to change your year-end date at any time (provided it hasn’t been altered within the last five years and subject to S216-S217 Income Tax (Trading and Other Income) Act 2005). Therefore if your profits are low you may choose to transition early and make the change for 2022/2023 tax year.

You can retain your existing year-end date but must still report on an actual basis. Consider a scenario with a 31 January year end: In 2024/25, you would need to report:

– 10 months of profit from accounts up to 31 January 2025

– 2 months of profit from accounts up to 31 January 2026

However, keep in mind that you won’t have actual figures by the filing deadline of 31 January 2026. Only in the 2023/24 tax year do you have the option to spread the excess profits.

The Basis Period Reform is a significant change in the UK’s tax landscape, particularly affecting sole traders and partnerships. Understanding its implications can help you navigate this reform effectively.

As the reform’s implementation date approaches, staying informed and seeking advice from tax professionals such as the team here at robinson+co will be crucial in ensuring a smooth transition and compliant financial reporting. For help or more information, please contact our experts today by calling 01900 603623 – we will be more than happy to help.