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Changes to Basis Period Reform – Sole Trader Businesses and Partnerships

In the last few months HMRC has 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. They will only be liable for... Read more

23 Aug 2023

By Gerry Hollingsworth

In the last few months HMRC has 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. They will only be liable for profits arising in that and subsequent tax years.

The concept of overlap profits or adjustments will no longer exist.

This is how it looks running up to 2024/25, which is the first year for which the reforms are mandatory:

  • 2022/23: Last year of the existing basis period rules.
  • 2023/24: Transitional year.

This is when businesses will have to move to the new fiscal year basis and, if not using the tax year as the basis period, will generate transitional taxable profits after their accounting period ends. For most businesses, this will could mean drawing up two sets of accounts: one up to the end of the existing basis period, and transitional accounts drawn up to 31 March 2024. Or accounts could be drawn up for the full 12+ month period.

  • 2024/25: The first year of the new basis. From this point on, businesses will only be taxed for profits earned in the tax year.

Most sole traders already use the tax year as both their accounting and basis period, of course, so these changes will not affect them. But those that have different accounting periods-such as 1 January to 31 December will use 2023/24 as a transition period because the basis year will be longer than 12 months.

Transitional Relief

The consequences of a longer basis period (e.g., six months for a business with an accounting date of 30 September) will in many cases lead to an increased tax charge which can be spread proportionally across the following five years (or paid more quickly, if desired).

How we can help

The mandatory reforms concerning the basis periods associated with unincorporated businesses require careful consideration that is tailored to specific circumstances. Please contact us if you would like to discuss the impact this reform will have on your business, including any decision your business is looking to take in changing its year-end to be in line with the tax year.

Our team of tax specialists would be delighted to help you manage this major change in legislation and to help you with ongoing business matters.

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