Basis period reform almost here: Are you ready?

What is the basis period reform?

The Basis Period Reform will mean that business profits are calculated to the tax year, rather than to the accounting period.

From 6 April 2024, all unincorporated businesses will be taxed to 31 March (or 5 April) regardless of their accounting year end. Tax year 2023/24 will act as a transitional year, where the basis period is made up of:

1. A ‘standard part’, being the normal basis period (i.e. the 12 months following the end of the basis period for 2022/23); and
2. A ‘transition part’, running from the end of the standard part to 5 April 2024 (or 31 March 2024 if accounts are drawn up to that date).

How is my business affected?

Let’s look at some examples:

• 31 March or 5 April year end? If you have a 31 March or 5 April year end this is the best case scenario, since your accounting year is already aligned to the tax year, therefore you will be taxed on 12 months as usual.
• 30 April year end? The worst case scenario is that you have a 30 April year end. This is because your 2023/24 tax return will include profits for 1 May 2022 to 31 March 2024 = 23 months.
• 30 September year end? If you have a 30 September year end, this will result in the profits of the year ending 30 September 2023, as well as the following period 1 October 2023 to 5 April 2024 (i.e. 18 months’ profit), all being taxable in 2023/24 (albeit reduced by any available overlap).
• 31 December year end? If you have a 31 December year end, this will result in the profits of the year ending 31 December 2023, as well as the following period 1 January 2024 to 5 April 2024 (i.e. 15 months’ profit), all being taxable in 2023/24 (albeit reduced by any available overlap).

HMRC recognises that this extra tax period could be a burden. So, in the transition year (2023/24) they allow for the additional months to be taxed across up to five years and you can also deduct overlap relief between the periods.

There are some considerations and calculations needed here, so you should speak to your accountant about the best options for you.

What should you do?

Unless you have a compelling reason not to, we would suggest changing your year end to 31 March to make things more straightforward moving forward. This will also avoid having to wait for the next accounts to finish the tax return.

There are of course commercial factors to also consider, particularly for international businesses and those in corporate groups where a change from a 31 December year-end may not be feasible.

For those who choose not to align with the tax year, there will always need to be an estimate of the profits of the later period with a subsequent amendment once the final figures are known.