Preparing for Basis Period Reform

Feb 6, 2024 | Tax Tuesday

Are you ready for basis period reform? Under the new rules, from 6 April 2024 all self-employed individuals and partnerships will have to report their business tax information to HMRC on a tax year basis, regardless of their accounting period.

First announced in October 2021, the long-awaited change means that sole traders, including partners in trading partnerships, will be taxed on their profits in the period from 6 April to 5 April. If you use an accounting date between 6 April and 30 March, then it will change how you file your tax return.

To alleviate any headache, HMRC’s recommendation is that sole traders should align their accounting period with the tax year, rather than their ‘current’ year. With this in mind, our latest Tax Tuesday explores what it would mean for your business to align with the tax year if you haven’t done so already.

What difference does it make if my accounting period doesn’t align with the tax year?

Previously, a business’ profits had been taxed on a current year basis, which meant that their profits were calculated based on their accounting period. This had the potential to create overlapping periods, causing complications in the calculation of tax liabilities.

Under the new rules if your year end remains as 31 July, then in 2024/25 your taxable profits would be 4/12 of the profits for year ended 31 July 2024 plus 8/12 of the profits for the year ended 31 July 2025. This would continue for each subsequent tax year, meaning that two sets of accounts would need to be prepared for each self assessment tax return.

Tax year 2023/24 is the transitional year. In this tax year you will be taxed on the profits from the end of your last accounting period to 5 April 2024. For example, if your year end is 31 July, in 2023/24 you will be taxed on the profits for the accounting year ended 31 July 2023 plus the transitional period of 1 August 2023 to 5 April 2024, creating a long period of more than 12 months. This long period could leave you with a hefty tax bill, however you may have overlap profits to offset against the transitional profit and there is also the opportunity to spread the additional tax over 5 years.

We are advising all our clients to extend their current year end to 31 March or 5 April 2024 to ensure that going forward the accounting year end lines up with the new regime. HMRC treats accounting periods ending 31 March to 5 April inclusive as aligned to the tax year.

How can sole traders and partnerships align with the tax year?

You can align your accounting period with the tax year by changing the start and end dates of your accounting period. To do so, you will need to complete box 11 on the self-employment (full) (SA103F) page of your tax return.

What are the benefits of aligning with the tax year?

There are a number of benefits to aligning your accounting period with the tax year. These include:

  • A simplified filing process – If you are a sole trader, there will be less paperwork involved in preparing your tax return. You’ll only need to submit one set of accounts covering both the business and personal finances – instead of two separate sets as is currently required by HMRC. This means that there’s less chance of making mistakes when submitting your return, which might otherwise lead to penalties later on!
  • Better compliance with HMRC regulations – Aligning with the tax year streamlines compliance with HMRC regulations such as PAYE coding requirements and record keeping requirements for VAT returns and, again, helps to prevent fines being imposed by HMRC.
  • Compliance with MTD – For most sole traders, MTD is mandated from 6 April 2024 (2025 for general partnerships and TBC for LLPs). Under MTD, businesses will be required to send quarterly digital updates to HMRC, based on transactions in tax year quarters (i.e. not current year quarters), and provide a digital “End of Period Statement” to finalise the taxable profit for the tax year.

What are the challenges of aligning with the tax year?

Aligning your accounting period with the tax year will have some initial implications for your business. You may need to adjust your accounting processes and the timing of payments, such as:

  • Adjusting how you account for expenses and income in each period.
  • Making adjustments to any prepayments made at the end of an accounting period that relate to future periods (for example, paying rent in advance).

What are the tax implications of aligning with the tax year?

As a sole trader or partnership, your tax liabilities may change if you align your accounting period with the tax year. They could be higher or lower, because:

  • Payments made before 1 April will be charged to profits in the previous year.
  • Payments made after 31 March will be charged to profits in the current year.

How can we help?

If you are a sole trader or a partner in a trading partnership, then we strongly suggest that you consider aligning your accounting period with the tax year, per HMRC’s recommendation, to simplify your filing process.

To discuss this in more detail, contact your usual relationship principal, email or call 0161 905 1616.