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Basis Period Reforms Explained: All You Need to Know About Changes to Accounting Periods for Tax Declarations

From the 2023/24 tax year, HMRC has introduced changes to the reporting period requirements for partnerships and self-employed taxpayers. Your 'basis period' is the 12 months over which you prepare your accounts and submit details of your income and taxable profits to the tax authority.

The idea behind the reform is to standardise the system, ensuring all self-employed taxpayers declare their earnings for a period similar to the official tax year – running from the 6th of April to the following 5th of April.

Let’s look at what the reforms mean, who will be impacted, and how to ensure your tax affairs are in good order before your next tax returns fall due.

A Summary of HMRC’s Basis Period Reform

As we've mentioned, those most affected will be sole traders who operate as self-employed businesses and partnerships – specifically, those whose current accounting period ends at any point other than between the 31st of March and the 5th of April.

Incorporated businesses, such as limited companies, are not involved in the reform and can continue to select any financial year that makes sense – but those who are not incorporated will need to change how they calculate taxable profits.

While there are a few additional nuances, such as impacts on self-employed taxpayers who already have a compliant financial reporting period but have unused overlap relief, the primary outcomes are as follows:

  • Self-employed taxpayers and partnerships with an accounting year-end date that matches the 5th April tax year-end date are largely unaffected.

  • Those with alternative accounting year-end dates within the range of the 31st of March and the 4th of April will need to treat their financial year as ending on the 5th of April – but without any major changes.

  • Taxpayers with any other tax year-end date must change how they prepare tax returns and accounting records to be consistent with the HMRC tax year.

If you are unsure which category you fall into or have unused overlap relief and need to ensure you respond to the reforms correctly, please contact SAS Accounting.

Further information about basis period reform is available through the government web pages.

Responding to Basis Period Reforms Depending on Your Year-End Date

Sole traders, partnerships and self-employed professionals with an accounting year that runs up to the 5th of April – which many choose for convenience – do not need to take any action.

Accounting Year-End Dates From the 31st of March to the 4th of April

Taxpayers with an accounting period end date that falls within five days of the 5th of April will have their records automatically treated as if their financial year ends on the 5th of April, introduced through late accounting date rules.

No complex transition is required, and you can continue preparing your tax returns and accounts as normal. Taxable profits earned between your year-end date and the end of the tax year will be rolled over into your next set of accounts and tax returns.

While there is the potential to opt out of late accounting date rules, this is unlikely to be beneficial for many businesses or self-employed individuals since it would mean apportioning income and taxable profits without any distinct reason to do so.

Accounting Year-End Dates Outside of the Period From the 31st of March to the 5th of April

Any self-employed trader or partnership with an accounting period ending outside of the allowable date range will see more impactful changes. Many businesses are expected to shift their accounting year to run alongside the tax year – this may be the most straightforward solution with minimum disruption.

However, changing your accounting period is not mandatory, and you may choose to retain the same financial year, making the necessary adjustments to your reporting processes. If this option is preferable, from 2024/25, that means:

  • Preparing two sets of financial accounts – one for your financial year and another for the tax year.

  • Paying tax liabilities, including income tax and National Insurance Contributions, against the tax year.

The complication is that taxable profits will vary from those in your financial accounts since they will cover different 12-month periods. Additional challenges may arise when more tax matters are enrolled into Making Tax Digital.

It may be worth considering the right strategy now, before approaching the end of the current tax year and the transition period, when compliance with basis reform rules will become mandatory.

Please get in touch to discuss your circumstances and the most appropriate options, or come along to our next Client Contact Morning for an informal chat about these changes and how they might impact your business.