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Changes To The Basis Period

Calling all COUNT clients! Are you a sole trader or partnership? Do your books run differently to the tax year? Here are some changes to the basis period that might affect you and what you can do. 

Jargon Buster (a quick refresher to help clear away the cobwebs)

Basis period = the time frame your business pays tax each year.

Unincorporated business = sole traders and partnerships (excluding limited liability partnerships)

Overlap relief = The tax relief granted to sole traders of partnerships for profits which are taxed twice in the first year of trading.

Bite Size Summary

  • Basis period reformed by HMRC to align with the tax year.
  • Transition year in 2023-24 before full effect in 2024-25.
  • Only unincorporated businesses with a basis period which does not end on the 31st of March or the 5th of April will be affected.
  • Affected businesses may face a higher tax bill in 2023-24 as potentially more than twelve months of trade will be taxed in the tax year. Reliefs are available but may not cover the full amount.
  • Businesses which opt not to change their basis period to match the tax year will face greater workload going forward. 

What’s changing?

In 2021 HMRC announced there was going to be a reform to the basis period with a transition year in the 2023-24 tax year before the reform takes full effect for the following tax year.

The change itself is to how unincorporated businesses calculate their tax each year. As it stands, unincorporated businesses use the current year basis and tax is calculated on the 12-month accounting period which ends in that tax year.

From 2024-25 these businesses will have to use the tax year as their basis period.

Who will this affect?

If you are a sole trader or partnership who already has an accounting date of the 31st of March or 5th of April there will be no impact as you already use the tax year as your basis period.

However, if your unincorporated business uses any other accounting date then these changes will have a direct impact on you.

How will the changes affect me?

In 2023-24 HMRC is providing a transitional year to allow affected businesses to move onto the tax year basis. In action this means that during the current tax year (2023-24) more than 12 months of profits will be taxed.

For example, if you use the 31st of December as your accounting date.

  • your business will report its profits from the 1st of January 2023 until the 31st of December 2023 as usual plus,
  • the 3-month period to 31 March 2024.

As the period is longer than 12 months your profit levels may be higher and as a result you may face a higher tax bill than you have done in the past.

Any overlap relief your business has will be offset against these additional profits however, they may not be enough to cover them entirely.

HMRC have taken this into consideration and are allowing these additional profits to be spread over 5 tax years.

Going forward your business would be expected to report income from two different sets of accounts which will increase the workload for both you and your accountant.

What are my next steps?

We would recommend aligning your accounting date with the tax year as this will cut down your workload and who can say no to that?! This is something we would be more than happy to do on your behalf.

For some businesses this may not be suitable, and you may wish to keep your accounting date as it is. We understand this and the team at COUNT are primed and ready to complete the additional work each year.

Please get in contact if you would like to make a change to the accounting date your business uses or if you are still unsure if these changes will affect you.