Basis Period Reform – What do I need to know?

From 6th April 2024, unincorporated businesses will move from an accounting year basis to a tax year basis. In short, only profits generated within the tax year will be assessed for income tax instead of their accounting year.

This reform will affect self-employed individuals, partners in partnerships and LLP’s.  Income Tax and National Insurance on your profits between your usual year-end and 31 March will be brought forward. However, there are transitional rules which relieve the tax pressure this may create.

When will this happen?

2023/24 – This is a transitional year…

  • Businesses that do not have an accounting year end date between 31 March & 5 April will need to recognise 2 profit elements; the ‘standard’ part (the normal accounting period) the ‘transition’ part (from the end of the ‘standard’ part to 5 April 2024).

2024/25 – This is when the new rules come into full effect…

  • Accountants and Bookkeepers will need to use the tax year basis for all sole trader and partnership clients.

What actions should you, the tax payer, consider?

  1. Understand the real impact of these changes on your business.
  2. Manage the immediate cash-flow impact of the changes.
  3. Consider changing your accounting date to 31st March to simplify the calculation of assessable profits from 2024/25.

Key Points to take away:

  • Effective from 6th April 2024
  • A business’s profit or loss for a tax year is the profit or loss arising in the tax year itself, regardless of its accounting date.
  • On transition to the tax year basis in the tax year 2023 to 24, all businesses’ basis periods will be aligned to the tax year and all outstanding overlap relief given.
  • Changing accounting periods to the tax year may avoid much of the complexity.

Unsure on how this reform may affect you? Speak to our experienced team today.

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