Basis Period Reform
May 30, 2024
What is the Reform?
This is a measure undertaken by HMRC commencing in the 2024/25 tax year (6th April 2024), with a ‘transitional’ period in the 2023/24 tax year. Essentially, the measure will remove the ‘Basis Period’ method of taxation, which is the over-complicated taxing of certain trading entities according to their accounting period, rather than the tax year.
What is the Basis Period?
To explain, in its simplest form, if an applicable party commenced trading part way through the tax year and decided, rather than completing that period of trading as at the end of the tax year and making their accounts up to that date, they carried over their trading to complete at the circa one year point from commencement, or greater period. Thus an ‘overlap’ had been created to the end of the first tax year and the principal tax chargeable determined on profit as at the end of the basis period falling within the following tax year. However, in the first year of trading an individual (including individual partners in a Partnership) would also be assessed for tax on commencement to the end of the first tax year, which could lead to ‘double’ taxation, in the event of a profit being made. This 'double' taxation was then relieved by ‘overlap relief’, however, the relief was normally carried forward to be applied at cessation of the business.
Here are some examples of how basis period taxation occurred prior to reform:
Example 1 - where accounting date in Year 2 is less than 12 months after commencement
A new trade commences on 6 January 2021. Accounts are prepared for the period from commencement to 31 December 2021, and to 31 December in each year after that.
The basis periods are:
| Year | - | - |
|---|---|---|
| 2020-2021 | Year 1 | 6 January 2021 to 5 April 2021 |
| 2021-2022 | Year 2 | 6 January 2021 to 5 January 2022 |
| 2022-2023 | Year 3 | 1 January 2022 to 31 December 2022 |
You can see that there are potential ‘double’ taxation periods from 6th January 2021 to 5th April 2021 and 1st January 2022 to 5th January 2022.
Example 2 - where accounting date in Year 2 is 12 months or more after commencement
A new trade commences on 6 July 2020. Accounts are prepared for the period from commencement to 30 September 2021, and to 30 September in each year after that.
The basis periods are:
| Year | - | - |
|---|---|---|
| 2020-2021 | Year 1 | 6 July 2020 to 5 April 2021 |
| 2021-2022 | Year 2 | 1 October 2020 to 30 September 2021 |
| 2022-2023 | Year 3 | 1 October 2021 to 30 September 2022 |
You can see that there is a potential ‘double’ taxation period from 1st October 2020 to 5th April 2021.
Example 3 - where no accounting date in Year 2
A new trade commences on 6 January 2021. Accounts are prepared for the period from commencement to 30 June 2022, and to 30 June in each year after that.
The basis periods are:
| Year | - | - |
|---|---|---|
| 2020-2021 | Year 1 | 6 January 2021 to 5 April 2021 |
| 2021-2022 | Year 2 | 6 April 2021 to 5 April 2022 |
| 2022-2023 | Year 3 | 1 July 2021 to 30 June 2022 |
You can see that there is a potential ‘double’ taxation period from 1st July 2021 to 5th April 2022.
There were also special rules applied concerning basis periods starting just before the end of the tax year, varying accounting dates and changes of accounting date. Needless to say, they made the ‘Basis Period’ taxation mode even more complex.
The Transition Period
Occurring in the 2023/24 tax year (tax return deadline 31st January 2025), the transition allows affected parties to start with a 'blank sheet’ as at the 6th April 2024 for accounting purposes, which is when the 2024/25 tax year commences.
This will involve them being taxed on a long period of account, incorporating their previous year-end within the 2023/24 tax year ('standard period’) and then the additional period up to the end of the tax year (’transitional period’). Any outstanding ‘overlap’ relief can be applied at this point and additional profit, applicable to the transitional period, can be spread over five tax years, including the year of transition, for the purposes of taxation.
| Profit Spreading Example | |
|---|---|
| Year-end 30 August 2023 | £80,000 |
| Period 1 September 2023 to 31 March 2024 / 5th April 2024 | £60,000 |
| Total | £140,000 |
| Less: overlap profits brought forward | (£10,000) |
| Taxable profits | £130,000 |
Under the former rules, the taxable profits for the 2023/24 tax year would be £80,000 but the transition results in taxable profits of £130,000 for 2023/24.
To avoid a significant impact on cash-flow, the excess profits of £50,000 can be spread across five tax years, with an additional £10,000 taxable each tax year from 2023/24 to 2027/28.
Who will the Basis Period Reform affect?
The changes will affect all sole traders (the self-employed), unincorporated partnerships and LLPs (and individual partners thereof) that currently do not prepare their annual accounts to a end of accounting period date between 31 March and 5 April.
The Solution
The solution to the issue, if you are affected and not currently a client of Taxeezy, is to register now and take advantage of the in-house expertise at your fingertips when you become a client. This expertise is available for all areas of taxation, regardless of your residence circumstances, within an annual fee (normally £130.00 inclusive) that covers preparation of your tax return and one-year of unlimited support. For Basis Period reform, for instance, Taxeezy advice might involve recommending that you change your accounting date to match the tax year and explain the mechanics of this.
For very complex matters, or tax projections/estimates, clients can take advantage of the ’ Taxeezy Doctor’ service that provides up to one-hour of ‘one-on-one’ consultation via Zoom video or telephone. This is very reasonably priced at £99.00 per session.
Register now, without obligation!