Basis period reform represents a major change in how the trading profits of unincorporated businesses (such as sole traders and members of partnerships) are calculated for income tax purposes.
In this three-part series, we look to breakdown the changes involved with basis period reform. Kicking off with part one, where we shed light on the change and how it represents a fundamental conversion in the relationship between a business’ chosen accounting date and its tax obligations.
What’s changed?
Since 6 April 2024, a new ‘tax year basis’ of assessment has applied to the trading profits of unincorporated businesses, such as sole traders and partners subject to income tax. Under the tax year basis, such businesses will be taxed on the profits arising in each tax year (6 April to the following 5 April), regardless of their accounting period end date.
This will replace the ‘current year’ basis, under which the tax for any one tax year is calculated using the profits of the accounting period ending in that year. Basis period reform therefore effectively breaks the link between the accounting date chosen by your business and when you are taxed on your profits.
The tax year 2023/24 represents a transitional year, in which we switch over from the current year basis of assessment to this new tax year basis.
Who is affected?
- Self-employed traders
- Partners in trading partnerships
- Trusts and estates
- Non-resident companies with trading income charged to income tax
Any business already drawing their accounts up to 31 March or 5 April (or any date in between) will also be unaffected.
How will the tax year basis work?
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). As noted above, if a business already draws accounts up to 31 March or 5 April (or any date in between), then this will be treated as the same as the tax year.
If your business has a year-end other than 31 March or 5 April (or any date in between), you will need to apportion amounts from two sets of accounts to calculate your profits for every tax year from 2024/25 onwards.
Calculating profits under the tax year basis
How is apportionment carried out?
Under the tax year basis, if a business does not draw their accounts to 31 March or 5 April (or a date in between), you will need to time apportion amounts from two sets of accounts to calculate your taxable profits each year.
The default is that this apportionment is carried out on a daily basis. For example, for the tax year 2024/25, a business with a 31 December year-end will need to apportion:
- 270 days from the year ended 31 December 2024; and
- 95 days from the year ended 31 December 2025.
However, a different time-apportionment (for example weeks or months) can be used, provided it is reasonable and applied consistently.
The Transitional Year (2023/24)
Which profits are taxed in 2023/24?
Tax year 2023/24 is a transitional year, in which we swap over from the current year basis to the new tax year basis. Specific rules apply in the transitional year, which may result in more than 12 months’ worth of profit being taxed.
To summarise, in 2023/24, businesses will be taxed on the profits of:
- The 12 months starting with the end of the basis period for 2022/23 (the ‘standard part’); and
- The period from the end of the standard part to 5 April 2024 (the ‘transition part’)
For most businesses, the standard part will effectively be the profits they would have brought into account under the current year basis. The transition part will then bring them from the end of that period up to 5 April 2024.
For example, a business with a 31 December year-end will be taxed on the profits of:
- the year ended 31 December 2023 (the ‘standard part profits’); and
- the period from 1 January to 5 April 2024 (the ‘transition part profits’).
To calculate the transition part profits, the results of the year ending 31 December 2024 will need to be time apportioned.
How can we help?
We understand that every business is different, and deciding whether to align accounting periods with the tax year must be considered on a case-by-case basis.
For more detailed guidance and support with the basis period reform, please don’t hesitate to get in touch our Commercial Client Director, Fabrice Legris, at fabrice.legris@fiandertovell.co.uk
Join us next week for part two of our series on basis period reform!