Did you know?
Base Period Reform is coming into force for tax year 5th April 2025 – simplifying tax for the self employed!
What is it?
Basis period reform (BPR) means that self-employed individuals (sole-traders) and partnerships will have to report their business tax information to HMRC on a tax year basis. This will be regardless of when their accounting period ends. Meaning you will be required to report to 5th April in line with self assessment tax return period ending dates.
The UK government ran a consultation during 2023 on the cash basis rules as part of its wider focus to simplify tax for small businesses aka the self employed.
Right now, more than 66% of self employed business’ don’t officially use the cash basis, even though the government believes many may benefit from its simplicity and had done so for years.
The number of taxpayers using the cash method is probably much higher than what is reported because of the number who do not realise they need to opt out of the default accrual basis.
So as a result HMRC are simplifying and expanding the cash method should create a more accurate picture of cash basis use across sole traders.
So what are the rules right now (2023/24 year)
Currently, for partnerships and self employed (sole traders), rules are based on the accounting end date of a business. This can create overlapping basis periods during which, in certain circumstances, tax can be charged on profits twice. This generates corresponding ‘overlap relief’ removing the double taxation when the business ceases or a partner leaves.
What is changing to the basis period?
Basis Period Reform alters how trading income is allocated to tax years. The aim of the Basic Period Reform measure is to simplify the basis period rules for the self-employed and partnerships. The changes mean that a business’s profit or loss for a tax year is the profit or loss arising in the tax year itself, regardless of its accounting date. This removes complex basis period rules and prevents the creation of further overlap profits and relief.
HMRC basis period reform – when do the changes take effect?
Basis Period Reform takes effect from the 2024/25 tax year beginning 6 April, 2024. This means a relevant business’s profit or loss for a tax year will be the profit or loss arising in that tax year. This is regardless of the accounting date. On transition to the tax year basis in the tax year 2023/24, businesses’ basis periods are then aligned to the tax year, with outstanding overlap relief given against transitional profits. This may result in a long taxable period, and the additional profits resulting from this can be taxed over five years. Therefore, this means that the way profits are reported for tax purposes changes from the 2023/24 tax year onwards.
Who is affected by these changes?
These changes will mainly affect partnerships and the self-employed (sole traders) not using an accounting period end date between 31 March and 5 April.
- Self-employed traders, including individuals who are also employed
- Partners in trading partnerships, which include limited liability partnerships (LLPs)
- Other unincorporated entities that have trading income. This includes trading trusts & estates as well as non-resident companies where trading income is charged to income tax
Furthermore, unincorporated businesses without an accounting period ending 31 March through to 5 April will have to make changes in calculating their business profits. This will then be adjusted in their tax returns from 2023/24 onwards. Anyone whose accounting period ends between these dates may be affected in the 2023/24 tax year where unused overlap relief exists.
Actions to take
Where Basis Period Reform applies to you, consideration should be given to whether changing your accounting year end. This should be undertaken as soon as possible.
Unless there is a significant reason for maintaining a different year-end, aligning this with the tax year is probably beneficial.
Continuing with a different year end will bring a requirement for additional time in preparing financial accounts alongside estimated tax figures. This could also result in additional accountancy costs.
With Basis Period Reform, the effect on future tax liabilities should be considered. This should include when these will become payable and the impact on cash flow.
Give us a call to discuss further and see how we can help you cut your tax bill!