Basis Period Reform: Changes on how business profits are taxed from 2023/24

July 25, 2023 Anitha Maheshwar

Basis period reform aims to create a simpler, fairer and more transparent set of rules for the allocation of trading income to tax years.

What does it mean for self-employed, traders, unincorporated businesses and LLPs?

Policy paper published in late autumn of 2021 listed out this measure to affect self-employed individuals, traders, other unincorporated entities with trading income including trusts, estates, and non-resident companies. Additionally, the businesses which have a different year end to 31 March or 5 April and those starting business from 6 April 2024 will be affected by this measure.

The reform in a nutshell

Accounting date is the date to which companies draw up their annual accounts every year. Business’ profit or loss for a tax year is usually for the year up to the accounting date called ‘basis period’. This can create overlapping basis periods which result in taxes being charged on profits twice and result in generating ‘overlap relief’ which is given back to the company when it ceases to trade. This basis is called ‘current year basis.’ For example, two identical businesses with different accounting dates may have different taxable profits for a tax year. And businesses with ‘current year basis’, will have to deal with double taxation in early years of trading with relief given only on cessation of trade.

Tax year 2024 to 2025:

From the tax year 2024 to 2025, this reform will change the ‘current year basis’ to ‘tax year basis.’ This means that profit or loss for a tax year is for the tax year itself regardless of the business’ accounting date, thereby doing away with overlap relief and related complexities. This reform will bring tax on trading income in line with tax on other forms of income for individuals namely property income and income from interest and dividends. And bring the tax payment closer to the time the profit was earned.

Tax year 2023 to 2024:

This will be the transition period where all businesses’ basis periods will be aligned to the tax year and all outstanding overlap relief given. The basis period will be the 12 months from the end of the basis period from 2022 to 2023 and a transition component from end of this 12 months to 5 April 2024. All overlap profits brought forward and that generated will be relieved in full in 2023 to 2024 and not carried forward into the ‘tax year basis.’

Other Benefits

The one-off costs during the transition are expected to be negligible. In fact, the reform is expected to create a continuing administrative cost saving for businesses. Some of the other benefits resulting from the reform include:

✔️ Not having to notify HMRC about change of accounting date.

✔️ Avoid remembering ‘Basis Period’ rules.

✔️ Avoid paying tax twice on the same profit without claiming relief till cessation.

✔️ Avoid calculating overlap reliefs carried forward in self-assessment tax returns.

✔️ Avoid risk of failing to use overlap relief by businesses that have been brought forward from many years previously.

How can I get support?

Having completed their obligations for the previous tax year, you will now need to plan how to implement the above changes to your accounting year-end that may reduce the administrative burden that these new rules may create.

We strongly recommend that you start planning for this change sooner rather than later. We at Dragon Argent can help. Book a discovery call by clicking below to find out more.