Basis Period Reform – changes to declaring tax for self employed and partnerships

Basis period reform (BPR) means that self-employed individuals and partnerships will have to report their business tax information to HMRC on a tax year basis. This will be regardless of when their accounting period ends.

What are the current basis period rules?

Currently, for partnerships and self employed (sole traders), rules are based on the accounting end date of a business. This can create overlapping basis periods during which, in certain circumstances, tax can be charged on profits twice. This generates corresponding ‘overlap relief’ removing the double taxation when the business ceases or a partner leaves.

What is changing to the basis period?

Basis Period Reform alters how trading income is allocated to tax years. The aim of the Basic Period Reform measure is to simplify the basis period rules for the self-employed and partnerships. The changes mean that 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. This removes complex basis period rules and prevents the creation of further overlap profits and relief.

HMRC basis period reform – when do the changes take effect?

Basis Period Reform takes effect from the 2024/25 tax year beginning 6 April, 2024. This means a relevant business’s profit or loss for a tax year will be the profit or loss arising in that tax year. This is regardless of the accounting date. On transition to the tax year basis in the tax year 2023/24, businesses’ basis periods are then aligned to the tax year, with outstanding overlap relief given against transitional profits. This may result in a long taxable period, and the additional profits resulting from this can be taxed over five years. Therefore, this means that the way profits are reported for tax purposes changes from the 2023/24 tax year onwards.

Who is affected by these changes?

These changes will mainly affect partnerships and the self-employed (sole traders) not using an accounting period end date between 31 March and 5 April.

  • Self-employed traders, including individuals who are also employed
  • Partners in trading partnerships, which include limited liability partnerships (LLPs)
  • Other unincorporated entities that have trading income. This includes trading trusts & estates as well as non-resident companies where trading income is charged to income tax

Furthermore, unincorporated businesses without an accounting period ending 31 March through to 5 April will have to make changes in calculating their business profits. This will then be adjusted in their tax returns from 2023/24 onwards. Anyone whose accounting period ends between these dates may be affected in the 2023/24 tax year where unused overlap relief exists.

Actions to take

Where Basis Period Reform applies to you, consideration should be given to whether changing your accounting year end. This should be undertaken as soon as possible.

Unless there is a significant reason for maintaining a different year-end, aligning this with the tax year is probably beneficial.

Continuing with a different year end will bring a requirement for additional time in preparing financial accounts alongside estimated tax figures. This could also result in additional accountancy costs.

With Basis Period Reform, the effect on future tax liabilities should be considered. This should include when these will become payable and the impact on cash flow.

Alexander & Co – expert accountancy and tax advice

Alexander & Co works with a wide range of clients, including self employed individuals, partnerships and limited companies. If you require advice on Basis Period Reform, we can assist clients on the best course of action to take. To discuss becoming a client, please email us: Alternatively, you can complete the enquiry form on this page, and we will be in touch.

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