In an effort to make the taxation process smoother and reduce complexities for sole traders and partnerships, HMRC is introducing Basis Period Reform from 6 April 2024. But what does this actually mean? This will change how taxable profits are calculated, especially impacting businesses with accounting periods that don’t align with the tax year.
Currently businesses calculate their taxable profits based on their accounting period, which can end at various points during the tax year. However, with the Basis Period Reform, unincorporated businesses will pay tax based on the profits earned throughout the entire tax year.
Who will be impacted?
This change will affect sole traders and partnerships with an accounting period end date falling outside 31 March and 5 April, as well as new businesses who start from 6 April 2024.
Understanding the calculations
The basis period for the 2023/24 tax year will consist of two parts:
- the client’s accounting year
- an additional part that extends to the end of the 2024 tax year
For example, a client with a 31 December year-end will report on their accounting period from 1 January 2023 to 31 December 2023, plus an additional transitional period from 1 January 2024 to 31 March 2024, resulting in a 15-month profit consideration for the 2023/24 income tax return.
How will this impact tax bills during the transition?
In the transitional year, tax bills will be higher for clients with an accounting date misaligned with the tax year, as profit will be calculated over a longer basis period. However, HMRC is providing relief by allowing taxpayers to spread overlapping profits over five years.
Overlap relief and double taxation
New businesses often encounter challenges of double taxation in their early years, and those who start midway through the tax year may be entitled to overlap relief. Basis Period Reform will alleviate these issues, making claims for overlap relief and dealing with double taxation a thing of the past.
TL;DR
HMRC’s Basis Period Reform is a significant step towards simplifying tax calculations for sole traders and partnerships, ensuring a more consistent and fair approach to tax assessments.
It’s essential for affected businesses to understand these changes and work closely with tax professionals to navigate the transitional phase smoothly and make well-informed financial decisions.
If you need some guidance, speak to a member of the team about how the Basis Period Reform could affect you.