From the 2024/25 tax year, the basis period will be reformed, which will have wide-ranging implications for many UK businesses.
Under the proposed changes, business profits subject to income tax will be assessed on the profits arising in the tax year regardless of when their accounts are drawn up.
The Government hopes that such a policy will create a simpler, fairer and more transparent set of rules for the allocation of trading income to tax years.
Regardless, the new rules might still be difficult for some people to understand and follow, so let’s take a deeper look at the basis period reform and what it means for you.
The basis period reform explained
Generally, businesses draw up annual accounts to the same date each year. This is called their ‘accounting date’. Currently, a business’s profit or loss for a tax year is the profit or loss for the year up to the accounting date. These twelve months are called the ‘basis period’.
Specific rules determine the basis period in certain cases, however, particularly during the early years of trading. These rules can then create overlapping basis periods, which charge tax on profits twice. ‘Overlap relief’ can be claimed for this which is usually given when a business ceases to trade.
The reform aims to move such businesses from this ‘current year basis’ to a ‘tax year basis’. Under this system, businesses liable for income tax would be taxed on profits arising in a tax year, regardless of their accounting date.
This change will remove the basis period rules and remove the need for the administration of overlap relief.
The transitional year
The transition period for the reform will be 2023/24. Here’s how it’ll work.
In 2023/24, continuing businesses will be taxable on their profits in the usual way with the current year basis (i.e. for the 12 months to their accounting date in 2023/24, plus the period up to the end of the tax year).
Depending on the accounting date of the business, this could bring up to almost two years’ profit into scope for the year. Businesses with 30 April as their accounting date are likely to be particularly impacted.
This could lead to significant cashflow disadvantages arising from a higher-than-usual tax bill., although it is proposed that the excess profit will be spread over a period of five years to mitigate the cashflow impacts.
The basis period reform was supposed to come into effect a year earlier but was postponed to give businesses more time to recover from the pandemic and prepare.
Get in touch to learn more about the basis period reform
The basis period reform is a complex change to an already complex system, so don’t hesitate to get in touch with us to discuss how your business could be affected.
You might want to, for instance, talk to us about whether changing your accounting date is a good idea for your business.
Whatever query you have, our specialist tax advisers are on hand to provide straightforward and easy to understand tax advice.
Talk to us about the basis period reform.