Basis Period Reform

Author: George Ian Hope BAcc(Hons), MSc(IT), FCCA, CGA, CPA
https://www.linkedin.com/in/gihope
Ian is a general practicing member of the Association of Chartered Certified Accountants with fellowship
status (FCCA). He is also a member of the Certified General Accountants Association of Canada (CGA),
and a member of Chartered Professional Accountants of Canada (CPA).

Who Is Affected?

If you are self-employed, either as a sole trader or as a Partnership, and your accounting year end date doesn’t fall between the 31^st March and the 5^th April each year then you will be impacted by basis period reform.

Where your year-end falls between 31^st March and the 5^th April then HMRC will treat your year-end as being the 5^th April and you will not be impacted,  However, irrespective of year end date, if you have carried forward unused overlap relief from earlier years you must take action to use this in the 2023/24 tax year or it will be lost (explained in more detail below)!

What is a Basis Period?

Basis periods are periods for which your business is subject to tax.

Prior to the current 2023/24 tax year basis periods were effectively the “accounting year” which ends in the current “tax year”, although there are special rules called the “opening year rules” which apply to the first few years of trading to ensure that all profits are subject to tax at least once.

A “tax year” runs from 6^th April in one year to the 5^th April in the next year.  So, the 2023/24 Tax Year runs from 6^th April 2023 to the 5^th April 2024.

In contrast an accounting year is typically a 12-month period which can end on any date.  Therefore, when you start your business you have flexibility in the accounting period you use.  You can:

• Use the tax year
• Use the date you started to trade
• Use the month end of the date you started to trade
• Use any other date depending on preference

The opening year rules are quite complex, and are the rules applied by HMRC, for businesses who use an accounting year which is different to the tax year (i.e. not 6^th April to the 5^th April), to ensure that all profits are subject to tax at least once.  In practice these rules result in profits which are taxed more than once called “overlap profits”.

Self-Employed traders therefore have to pay tax twice on some of the same business profits!  This overpayment of tax on the same profits is called “overlap relief” and HMRC will NOT pay some or all of this money back until either the trader:

• Changes the accounting year end date of the business to bring it closer to the tax year date
• The business ceases to trade

There is therefore an incentive in the earlier years to use the tax year as your accounting year!

Up until the current 2023/24 tax year a trader would be subject to tax (via self-assessment) on the profits for the accounting year which ends in the current tax year.

E.g. So in your 2022/23 tax return (submitted before 31^st January 2024) you will have been subject to tax on your business profits (the profit subject to tax per your businesses accounts) for the accounting year which ended between 6^th April 2022 and 5^th Aril 2023.

So why would anyone choose an accounting year which doesn’t match the tax year?  In practice there can be many “commercial or preference” reasons why businesses choose a different accounting year.  In addition, from a tax perspective although the opening year rules often result in double taxation, many businesses may find that profitability is low and may even be loss-making in these earlier years.  Whereas, choosing an accounting year which is different to the tax year would allow you to “defer” the payment of some taxes each year because you are only immediately taxed on the profits you make up until the end of the accounting year, and any profits you make after this would be subject to tax in the following tax year.

Following basis period reform this is going to change, effectively removing this tax deferral incentive!  There is therefore now even more incentive to change your accounting year to match the tax year.

What is Basis Period Reform?

From the 2024/25 tax year self-employed individuals and partnerships will be subject to tax via self-assessment on the profits of their business using the tax year basis, regardless of their accounting year.

The 2023/24 tax year will therefore be treated as a “transitional year” and HMRC have created new rules to explain how the profits which occur between the end of the accounting year and the end of the tax year will be taxed.

If you currently have an accounting period which ends between 31^st March and 4^th April then HMRC will treat the accounting year end as being 5^th April for tax purposes and no application of these rules will be required.

For all other companies from 1^st April 2024 you will have to use information from two different sets of accounts (e.g. by time apportionment of profits) to submit your tax returns!  And for those businesses that have an accounting year end date which is very late in the year, this means you may need to use estimated figures in your self-assessment tax return if your business accounts are not ready yet, and then resubmit your self-assessment again with adjusted non-estimated values when the business accounts are complete.  (It is possible to change the values in your tax return for up to 12 months where you advise HMRC that you have used estimated values in your tax return.)

So the new rules will make the process much more complicated for businesses which have an accounting year which does not align with the tax year!

While it is still possible for new businesses who start trading in the 2023/24 tax year, to use an accounting year which is different to the tax year, the new rules make the process much more complex and therefore definitely incentivize you against doing this.  Under the tax year basis, you will be assessed to tax on the profits which occur from the date your trading commenced to the next 5^th April on your next tax return.

What are the 2023/24 Transitional Rules?

For those businesses who do not have an accounting year end date between 31^st March 2024 and the 5^th April 2024 the following rules must be applied:

• Calculate ‘standard part’ profits – Profits for the 12-month period which would usually end within the 2023/24 tax year (i.e. normal accounting year basis).
• Calculate ‘transition part’ profits – Profits for the period from the end of the ‘standard part’ to 5^th April 2024 (i.e. profits or the period from the end of the accounting year to the end of the tax year), using (e.g. daily) time apportionment.
• Deduct any overlap profits from the ‘transition part’ – If you have any overlap relief brought forward (i.e. profits which you were taxed twice when you started the business or changed business year end, discussed above) this can be subtracted from the ‘transition part’ to reduce the value of profits subject to tax. If you don’t do this in the 2023/24 tax year carried forward overlap relief will be lost!
• The total profit subject to tax will therefore be the total of all of these (Total Profits/(Losses) = Standard Part + Transition Part – Overlap Profits).

When Do I Need To Pay Tax On These “Transitional Year Profits”?

There are more detailed rules which explain when the transitional profits (i.e. Transition Part – Overlap Profits) will be taxed.

To try and reduce the burden of paying tax immediately on the full value of these transitional profits in the 2023/24 tax year HMRC have agreed to automatically spread the value evenly over the next five tax years: 2023/24, 2024/25, 2025/26, 2026/27 and 2027/28. This means that 20% of the transitional profits will be taxed in each tax year.

Taxpayers can elect for more than 20% to be applied in earlier years (for instance if they have made losses in these years) but you cannot allocate more to future years.

Where the transitional profit figure is a loss then no spreading is performed.  Likewise, where the standard part is a loss, this can be used to reduce the value of transitional profits before spreading is applied.

Can I Change the Business Year End?

Yes, and unless you have genuine commercial or preference reasons for using an accounting year which is different to the tax year you should seriously consider doing this, in the 2023/24 tax year!

This is because there is no longer a cash flow advantage of deferring the payment of taxes to a future tax year AND producing a self-assessment tax return will now be much more difficult if you don’t do this because this process cannot be performed accurately until the business accounts for two years have been completed, and time apportionment of profits will be required.

The current rules for changing the accounting date of your business as defined by HMRC are as follows:

• You must tell HMRC about the change of accounting date in your tax return (box 11, and in box 12 if applicable, on the self-employment full supplementary pages SA103F) and file your tax return on time.
• The new date must not create an accounting period which is longer than 18 months.
• If you previously changed the accounting date in the previous 5 tax years, you must provide a commercial reason to HMRC why you wish to make the change.

If any of these conditions are not met, then HMRC may not recognize the change as being valid.

However, in order to encourage businesses to make these changes, these rules do not apply in the 2023/24 transitional year!  Furthermore because of the spreading rules (discussed in the ‘When Do I Need To Pay Tax On These “Transitional Year Profits”?’ section above) it is possible to defer the impact of the tax burden over the next five tax years.  If you change the accounting year end date in any other tax year these benefits will not be available!

How Are My Self-Assessment “Payments-On-Account” Impacted?

Self-Assessment applies a “payment-on-account” system whereby if you paid more than £1k in tax in the previous tax year, then HMRC require you to make payments on account for the current tax year.

A payment on account equals one half of the previous year’s tax liability, and the first payment on account must be made before the end of January (during the tax year), the second payment on account must be made before the end of July (immediately after the tax year), and a “balancing payment” of any additional tax due must be made before the end of the next January (after the tax year), along with associated payments on account for the next tax year.

As your payments on account are half the previous year’s tax liability, increasing the tax paid by the transitional profits will increase your payments on account.  But you can opt to reduce these where applicable (for instance in the final year when transitional profits will be taxed).

Can QAccounting Help Me?

Yes!  At QAccounting we completely understand that these rules along with taxation in general can be confusing for clients.  We are here to help you every step of the way, whether you need to understand the rules in greater detail or need advice about next best steps.

Please give us call or contact us online to speak to a member of our Accounting team without delay!

In addition, our Self-Assessment Personal Tax Return Checklist has questions to guide clients about the information we need from you to prepare you tax return accurately, incorporating the changes required for basis period reform.  So we will also be happy to submit your tax return, incorporating these changes on your behalf!