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Basis Period Reform: Changes for sole traders and partners

by James MacDonald

11 April 2024

Basis Period Reform is a change in how income tax is calculated for unincorporated businesses, such as sole traders and partners, in the UK. Here's a summary of the main changes to help you understand what this means in practice.

What is Basis Period Reform?

Basis Period Reform is a change in the way that income tax is calculated for unincorporated businesses in the UK. It means that from the tax year 2023/24 onwards, the taxable profits of a business will be aligned with the tax year, which runs from 6 April to 5 April, regardless of the accounting date chosen by the business.

Outlined below is a summary of the key changes to help you navigate the practicalities of the reform.

 

What is changing and when?

The tax year to 5 April 2024 is the Transition Year for self-employed taxpayers to move to being taxed on annual profits coinciding with the tax year. The tax year is 12 months to 5 April or 31 March – but those dates are generally considered to be the same. Previously, they had been taxed on the results of their chosen 12 month accounting period that ended within the tax year. The new Tax Year basis for taxing profits is mandatory and applies from the 2024/25 financial year.

 

Who is (and isn’t) affected?

The rules for taxing companies are not changing.

Only trading businesses that are subject to income tax and prepare annual accounts to a date other than 31 March or 5 April are affected by basis reform period. It applies equally to sole traders and to individual (non-corporate) partners in a partnership.

 

How is taxable profit for 2023/24 calculated?

For these businesses, the profit taxable for 2023/24 is made up from two parts, the “Standard part” and the “Transition part.”

Standard part

The profit that would normally be taxed for 2023/24 under the “old” rules so for a business that has accounts made up for a calendar year to (say) 30 September, this is the profit for the year to 30 September 2023.

Transition part

The profit for the period from (in this instance) 1 October 2023 to 5 April 2024. If the next accounts are made up for the year to 30 September 2024, the profit will need to be apportioned to that period. HMRC considers that the normal basis of apportioning profits is by reference to the number of days falling within the relevant period but they will accept a different apportionment if it is reasonable and used consistently. For example, the apportionment can be by months or weeks.

Overlap profit

Many self-employed taxpayers will have Overlap profit brought forward from when they started trading, and this must be deducted from the Transition profit. Often, the Overlap profit will have arisen many years ago.

How to find out your overlap relief figure

If a business has no record of the amount of relief they are entitled to, they may request that information from HMRC. The easiest way to do so is to use a dedicated online form available through HMRC’s website. Taxpayers must sign in with the Government Gateway credentials they use for self assessment and provide other details including their UTR number, the date they started trading and details of any previous changes to their accounting period.

The Overlap profit may only be deducted from the Transition profit and there will no future opportunities to claim relief for it.

HMRC plans to publish an online calculator to help people to work out their transition profit. Their website states that this will be available from April 2024 but does not give a specific date.

 

Tax on the Transition Profit

When can you spread excess profits?

HMRC recognises that the transition profit gives rise to an increase in the tax burden for those self-employed people who are affected by the new basis period provisions. To alleviate this to some extent, ‘spreading’ is a method of easing the tax impact of additional profits being brought into account as a result of the basis period reform transitional rules. The transition profit may be spread over 5 tax years starting with 2023/24 and ending with 2027/28.

How does spreading work?

A minimum of 20% of the transition profit after Overlap Relief must be taxed for 2023/24, but taxpayers can elect for a greater amount to be taxed in that year. The remaining transition profit will be taxed in equal instalments spread over the following four tax years.

For anyone ceasing to trade, including on retirement, on or before 5 April 2027, any transition profit that that has not previously been taxed must be taxed for the year in which their business ceased.

2024 Self Assessment Tax Returns will include boxes to report:

  • The Transition Profit
  • Overlap Relief
  • How much of the transition profit after Overlap Relief is to be taxed in 2023/24.

 

Accounting Date

Does this mean accounts have to be drawn up to 31 March or 5 April?

No. Businesses remain free to draw up their accounts to any date they wish. It is only the taxation basis that has changed.

Businesses may have a number of commercial reasons for having their accounts drawn up to a date other than the end of the UK financial year and the new provisions do not compel them to change this. When an accounting year end other than 31 March / 5 April is retained, individuals taxable by reference to those trading results will be required to apportion the results of (normally) two accounting periods to arrive at their personal taxable profit for the year.

 

Partnership Tax Returns

Are payment and/ or filing dates changing under Basis Period Reform?

No. As indicated above, there are no changes in the legislation on the requirements for the information to be included on a partnership tax return, so a partnership that makes its annual accounts up to 31 December 2024 would submit its 2024/25 SA800 with the relevant figures from those accounts. Individual partners would however need to apportion their profit shares for their personal tax calculations.

The deadlines for submitting personal tax self-assessment returns are not affected by basis period reform. In most situations they must be filed no later than 31 January after the end of each tax year.

 

Making Tax Digital (MTD)

How will basis period reform interact with MTD?

Basis Period Reform forms part of an overall strategy intended to simplify and digitalise the UK tax system. MTD for unincorporated businesses is scheduled to start from the tax year 2026/27 and implementing the same reporting period across the board should in theory make it more straightforward to administer.

 

How can we help?

While this article provides a basic overview of the main implications of the Basis Period Reform, it doesn’t cover every detail. For personalised advice specific to your situation, please get in touch with me, James MacDonald.

James MacDonald

Senior Manager

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