Basis Period – are you ready for the transition?

Last year HMRC issued a significant update regarding basis period reform

As of the 2024/25 tax year, all affected businesses have to use the tax year as their basis period.

2023/24 is the year of transition to the new basis period rules for self-employed and partnership businesses.

Here we go through some practical examples.

Example:

Ms A has a year end of 31 December:

Her position has previously been:

So far, so simple: the profits from the accounts year that ended in each tax year were reported on the tax return.

Under the new rules:

Any business with a non-31 March or 5 April year end will have an unusual tax position in 2023/24, as the end of their taxing period (basis period) will be 31 March (or 5 April) regardless their accounts’ year end. They will also be taxed on the 12 months to 31 March, regardless their year end.

What should you do?

So, unless you have a compelling reason not to, we would recommend making life simpler and changing your year end to 31 March. This also avoids having to wait for the next accounts to finish the tax return – if you have a December year end, you need the 31 December 2024 accounts to finish preparing the 2023/24 tax return due for filing by 31 January 2025!

Dealing with December and April year ends

OK, a December year end doesn’t look so bad, but what about the worst-case scenario of an April year end?

Tax return for 2023/24 = profits for 1 May 2022 to 31 March 2024 = taxing 23 months!

HMRC recognises that this could be a burden. So they do allow for the additional months in this transition year to be taxed across up to five years.

And you may remember that when a non-31 March (or 5 April) year end first reported, it may have had overlap profits (double taxed in the first and second years of the business). These can now be deducted.

Our December year end therefore becomes:

Profit for the 12 months to 31 December 2023 (standard amount)

+ 20% (or more) of [3 months to 31 March 2024 – overlap] (transition amount)

And our April year end:

Profit for the 12 months to 30 April 2023 (standard amount)

+ 20% (or more) of [11 months to 31 March 2024 – overlap] (transition amount)

Each subsequent year has 20% (or more) of this transitional amount added to its profits until they are used up.

How we can help you

Our team of tax advisors are on hand to help you navigate the transition.

• advising on how much of the transitional amount to include in each tax year,
• advising on whether to change year ends on a long period or prepare two periods of accounts,
• completing the transitional tax return,
• dealing with losses,
• monitoring the transition amount,
• mismatched partnership and partner tax returns

Related content

• Sarah Messruther
• ARTICLES