Basis period reform – what does it mean?
Posted on 26th March 2024
At the moment businesses work out their taxable profits for their accounting period. This can end at any time during the tax year.
However, HMRC is changing the basis period that sole traders and partnership businesses use to work out their taxable profits.
From the 2024/25 tax year starting on 6 April 2024 unincorporated businesses will pay income tax based on their profits in the tax year to 5 April 2025. This will apply for future tax years too.
Basis period reform
This change is known as basis period reform. It affects sole traders and partnerships with an accounting period ending outside 31 March to 5 April. It will also affect new businesses that start operating from 6 April 2024.
What is the ‘basis period’?
The ‘basis period’ is the span of time businesses use to work out their profits and tax.
Currently income tax is based on the profits earned during your business accounting period. Generally, you’ll use the same year end date each year. For example, if your business has an accounting year end date of 31 October, your taxable profits will be calculated from 1 November in one year to 31 October the following year.
However, from this year onwards the basis period is the UK tax year of 6 April to 5 April instead.
What is the difference between my accounting period and basis period?
You can choose your own accounting period to produce your financial reports. For example, financial statements for lenders or auditors.
HMRC uses your business’s basis period to work out your income tax liability as well as other tax liabilities.
Often accounting periods and basis periods are the same, but sometimes they aren’t. So, for example, you might have started your business in the middle of a tax year so your accounting period could run from 1 June to 31 May. From now on your basis period is 06 April to 05 April.
What is the basis period reform?
HMRC’s changes standardise the period used to work out everyone’s income tax. Your income tax is now based on the UK tax year of 6 April to 5 April the following year. This applies from 6 April 2024, with transitional rules for the 2023/24 tax year.
You can still use different accounting dates but you’ll have to reallocate your taxable profits for each tax year.
Who’s affected by the basis period reforms?
The change affects unincorporated businesses operating as:
self-employed traders including those with a profession or job
partners in trading partnerships including limited liability partnerships (LLPs)
other unincorporated bodies with trading income such as trading trusts and estates and non-resident companies.
It could also affect businesses benefiting from government schemes like research and development (R&D) tax credits.
I’m self-employed. Am I affected by the basis period reforms?
If you’re self-employed and your accounting period matches the tax year you can continue as normal.
If you use a different accounting period, the changes could mean you must submit estimated profits for at least part of your accounting period. There’s guidance available from HMRC on how to do this. Your bookkeeper can help too.
If you’re in a partnership the changes could affect your cashflow. This will depend on whether you and your partners decided to spread profits during the transitional period. If you’re not sure whether this applies to you we’ll be happy to do some cashflow modelling for you.
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