Why basis period reform actually does matter

Your tax liability may be higher

Basis period reform is a change that affects unincorporated businesses only – not companies. Within that group, it only affects businesses that don’t use a 31 March or 5 April year end. You may have seen it called a change to the ‘tax year basis’ – because what it does is change the way that your trading income is allocated to tax years:

• until now, if you’re an ongoing trader, the rules have been based on the accounting date of your business
• from 6 April 2024, they are based on the tax year
• the change will impact you before 2024
• this is because the current tax year (2023/24) is a transition year, with its own rules about how profits are calculated
• this directly affects the amount of tax paid.

In short, if your business doesn’t have an accounting year ending on 31 March or 5 April, the tax calculation this year is based on a longer period than usual. It’s based not just on the profits to the end of your normal accounting period: but also on a proportion of the profits from the end of your accounting year up to 5 April 2024 - the date that the new tax year basis begins. Clearly this is likely to mean higher tax bills in 2023/24. It also affects the following four years. The impact of this on cash flow will need consideration.

This isn’t necessarily the end of the story. Your individual mix of income will also affect how much tax you pay. For some people, the change could also mean the need to think about the possibility of the personal allowance being restricted, as occurs if adjusted net income is more than £100,000.

What can be done about it?

The good news is that routine tax planning strategies such as pension planning, Gift Aid donations and careful allocation of profits between family members, may all be available to help.

There are also two primary reliefs to help lessen the impact of higher tax bills:

• spreading relief: businesses with higher profits in 2023/24 because of the change will automatically have their additional ‘profit’ spread over five years. This is something you can opt out of, and we can help you decide on the best route for your business
• overlap relief: historically, what are called overlap profits can arise in the first years of trade, with adjustments to the tax bill made when the business ceases. Any overlap relief your business is due must be used now or it will be lost.

Getting the appropriate figure for overlap relief may not be straightforward in every case: for example, where HMRC does not have a record of this from previous tax returns; or where businesses have changed their accountants. Partnerships have their own complications, with each partner having their own figure for overlap relief. These are all things we will discuss with you.

It doesn’t stop there

The change also affects the yearly preparation of accounts and tax returns. In future, information from two sets of accounts, not one, will have to feed into the tax return, adding to the work done. Many businesses in this position will need to submit provisional figures, with adjustments made later, probably in the following year’s return.

The solution for some businesses is a change of accounting year end, moving to 31 March. It will not be the case for every business, particularly where there are compelling commercial reasons to use a different year end, such as 31 December. This is also something we will review with you.

Basis period reform will be experienced as quite a disruption for many businesses. We will do all we can to help you through the change.