Basis Period Reform: What you need to know

Who is impacted?

Those with business profits that are subject to income tax:

  • Self-employed
  • Partners in general and LLP partnerships
  • Trusts

Who do not have an accounting year end of 31 March or 5 April will be impacted by the changes that came into force on 6 April 2023.

What is the impact from 2023/24 onwards?

Historically, businesses could set an accounting year-end date that did not need to align with the tax year. Profits were then taxed depending on when the accounting period ended.

For example, an accounting year end of 30 April 2023 would be taxed within the 2023/24 tax return as the accounting year end is between 6 April 2023 and 5 April 2024.

From 6 April 2023, instead of using the accounting period to determine taxable profits, those with business profits will be taxed on income earned for the full tax year, 6 April to 5 April.

Cashflow concerns

There will be administrative and tax implications due to this change on an annual basis.

If your accounting year end is not 31 March or 5 April, you will annually need two sets of accounts in order to prepare your personal tax return. As a proportion of profits from each set of accounts will fall within the tax year.

Within 2023/24, as this is the transitional year of these rules coming into force, you may have a significantly higher than normal tax liability to settle in January 2025.

We are happy to chat through the impact these changes will have on your personal tax position and help with cashflow predictions.

Help with tax payments in 2023/24

To help with the potential increased tax burden for 2023/24, individuals can spread what is known as the transitional profit proportion that arises in 2023/24.

Effectively this means you can evenly distribute these transitional profits over 5 years, which will reduce the immediate cashflow impact.

Let’s talk

The new basis period rules will put an additional administrative burden on the accounts and tax return processes, which may have professional cost implications to you.

Please get in contact if you would like to discuss the implications you may personally encounter, including the potential to change your business accounting year-end.

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