Tax Basis Reform in 2024: How Accounting Period Changes Impact You

Tax Basis Reform in 2024: How Accounting Period Changes Will Impact Sole Traders & Partnerships

February 14, 2024

As we approach the end of the 2023/24 tax year, some businesses will need to prepare for a significant shift in tax reporting. The longstanding method of taxing business profits based on the current year basis, where profits are calculated according to a business’s accounting year chosen by the business, is set to change.

From the start of the 2024/2025 tax year (6th April 2024), the basis period reform could notably alter how you report your profits to HMRC, so not staying informed could lead to unnecessary additional tax payments.

Below we look at the implications of the Tax Basis Reform in the UK and how they will impact unincorporated businesses such as partnerships and sole traders.


Understanding the Basis Period Reform: Why It Matters

HMRC is introducing this reform with the aim of establishing a simpler and transparent system for allocating trading income to tax years.

Presently, two identical businesses could report vastly different taxable profits solely based on their accounting dates. This reform will standardise the tax year basis, leading to more consistent outcomes across businesses, according to HMRC.


Who Will Be Impacted?

The basis period reform is relevant to sole traders and members of ordinary partnerships who do not align their annual accounts with the 31 March to 5 April window, which typically includes mainly seasonal businesses such as in the hospitality, leisure and tourism industries and large partnerships

It also extends to trading trusts and estates and non-resident companies with trading income under Income Tax. Notably, businesses initiated on or after 6 April 2024 will see their profits taxed in the tax year they arise.

For sole traders and ordinary partnership members with a 31 March-5 April accounting year-end, the impact is minimal, unless they possess unused overlap relief.


What is Overlap Relief?

Businesses with accounting year-end dates outside the April 6 to March 30 window might have experienced double taxation on some profits. With recent changes, they may now utilise overlap relief to reclaim this money, traditionally reserved for when trading ceases or accounting dates change.

These overlap profits can emerge in the initial years of a business or during any accounting date change. Crucially, all existing overlap relief must be utilized during the 2023/24 transition period. Failure to do so by 5 April 2024 will result in the forfeiture of this relief, irrespective of any subsequent changes to the accounting period.


How to Apply for Overlap Relief on Your 2023-24 Tax Return

Businesses can now request details about their overlap relief eligibility through a form provided by HMRC. This form will assist clients in verifying their entitlement and gives guidance on how to claim back this money. It's crucial to remember that HMRC can only provide overlap relief information if it is recorded in their system.


How to Adjust Your Accounting Period for your Tax Returns?

Additionally, any businesses with accounting dates outside the April 6 to March 30 window might also want to consider adjusting their accounting period to coincide with the tax year-end if it is viable for them to do so.

For many businesses, unless there’s a compelling commercial rationale to keep a different year-end, it is likely to be more practical to synchronize the fiscal year-end with the tax year. This alignment often simplifies financial planning and reporting.

However, if you choose to retain a distinct year-end, be prepared for potentially increased accounting fees. This is because it necessitates preparing both the regular financial accounts and additional estimated figures up to either 31 March or 5 April.

To facilitate changing your year-end tax period, you or your accountant should complete box 11 on the self-employment page (SA103F) of your tax return.


Confused by Tax Basis Reform Changes? We Can Help!

For many tax payers without a traditional year-end accounting period, understanding and adapting to the basis period reform is crucial. Planning ahead or speaking to your accountant about the changes can prevent unnecessary tax burdens and ensure smoother financial operations in the upcoming tax years.

If you are confused by the tax basis reform changes and need help changing your accounting period, Linggard and Thomas can help. We are chartered accountants that can help with everything from tax returns to management accounts. Get in touch today to see how we can empower your business to grow.

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