Basis Period Reform – Will your accounting year end change in 2024?

Client Note: We have already sent all clients affected by this change a helpsheet with their year end accounts information request letter.

  • What is "Basis Period Reform"

    Basis period reform changes the way businesses pay tax.

    Previously, tax was based on the profits or losses for the accounting period that ended within the tax year (e.g. an accounting year end of 30 April 2022 was taxed in the 22/23 tax year).

    From April 2023, tax is based on the profits or losses arising in the tax year itself, which runs from 6 April to 5 April each year. 

    (See example below)

  • Who is (and isn’t) affected?

    Only trading businesses subject to income tax, such as sole traders and individual partners in a partnership, are impacted by basis period reform.

    Companies, which are subject to corporation tax rules, remain unaffected.

    Businesses with accounting periods ending on 31 March or 5 April (or any date in between) are not affected.

    Property income, already reported on a tax year basis, remains unaffected by the change.

  • Example of how you will be taxed if your year end is not between 31st March and 5th April

    Under the tax year basis, businesses will be subject to tax on their profits arising in the tax year (i.e. from 6 April to the following 5 April).

    The example below is for a trader who has a 31 December accounting year end:

    Tax Year Basis Period (Taxable Profits) Tax Return Filing Deadline
    22/23 – OLD RULES Accounting year end 31 December 2022 31-Jan-24
    23/24 – NEW RULES Accounting year end 31 December 2023 PLUS 1 January 2024 to 5 April 2024 LESS Overlap Relief (see note below) 31-Jan-25
    24/25 – NEW RULES 6 April 2024 to 5 April 2025 31-Jan-26

    Note for all current clients: we have a record of the amount of relief you are eligible to claim and we will automatically offset this when preparing your accounts.

  • Overlap Relief

    If your business made taxable profits in the first year of trading, you can claim tax relief against the taxable profits arising in 2023/24.

    If you do not know if you have any overlap relief, check with your accountant or you can use the dedicated online form (you will need a government gateway account to use this form) or contact HMRC and they will be able to advise you: https://www.gov.uk/contact-hmrc

    Note for all current clients: we have a record of the amount of relief you are eligible to claim and we will automatically offset this when preparing your accounts.

    Businesses must offset all overlap relief they are entitled to in their 2023/24 tax return.  If they do not, they will not have a further opportunity to do so in the future, and all entitlement to overlap relief will be lost.

  • Transition profits and how these are taxed

    If under the new rules your taxable profits are higher than they would have been under the old rules, it is possible to spread these profits (known as transition profits) over 5 years to help reduce your tax payments.

    You do not have to apply to spread the tax over 5 years, this can be down upon calculation and before submission (your accountant will be able to do this for you).

  • Will transition profits affect tax credits, universal credits and child benefit?

    Tax Credits: only standard part profits should be included when calculating awards. Transition part profits should not be included when reporting earnings for the renewals process.

    Universal Credit: transition profits should not be included in the earnings reported to the Department for Work and Pensions (DWP) each month. However, if additional tax or National Insurance contributions are paid as a result of basis period reform, this could affect a taxpayer’s universal credit.

    Child Benefit: No affect. The £60,000 High Income Child Benefit Charge (HICBC) threshold is based on adjusted net income. As transition profits are excluded from net income (see above) then they should not, on their own, cause this threshold to be breached.

 

 

REMEMBER:

Going forward, your new financial year end will be 5 April

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