Basis Period Reform: Key accounting dates and Making Tax Digital

Basis Period Reform: Key accounting dates and Making Tax Digital

Welcome to the final part of our series discussing all things basis period reform. In part 1, we outlined the changes involved and how they affect a business’ chosen accounting date along with their tax obligations. Part 2 delved into overlap relief and how best to utilise it during the transition.  

Now, in this final part, we investigate the finer details of basis period reform coming into force in 2023/24, with information on practicalities and interacting with Making Tax Digital, as well as some important considerations for businesses. 

Practicalities 

Can I change my accounting date to avoid basis period reform? 

Changing accounting date to 31 March or 5 April (or any date in between) will reduce ongoing administrative burdens from April 2024 onwards. In particular, it will remove the need to apportion figures from more than one set of accounts, and the possibility of having to file and correct provisional figures (see pt1).  

However, it will not remove the need to apply the transitional rules in 2023/24, or prevent additional profits being brought into account. 

If the change in accounting date takes effect in 2023/24, the business may however be able to access spreading (see pt2). 

The usual restrictions on changing accounting date are also disapplied from 2023/24. This means that, if it wishes, a business can draw up a set of accounts exceeding 18 months in length to effect the change. For example, if a business has a year-end of 30 April, they could change this by drawing up a single 23-month set of accounts for the period from 1 May 2022 to 31 March 2024. There is also no need to worry about having a commercial reason for the change where there has been a previous change in the last five years. 

However, whether a change in accounting date is suitable or possible is also a commercial decision, and businesses will need to consider the wider pros and cons beyond tax. 

How will basis period reform interact with Making Tax Digital? 

Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) will be introduced from April 2026 for businesses with turnover of £50,000 or more, and from April 2027 for those turning over at least £30,000. 

Taxpayers in scope of MTD ITSA will have to submit quarterly updates of their income and expenses to HMRC. These quarterly updates will align with the tax year, and not the accounting period of the business. 

The introduction of the tax year basis from April 2024 may make alignment with MTD for ITSA quarters easier. However, it should be remembered that, if the business does not have a 31 March or 5 April year-end, then under the tax year basis it is not the transactions actually taking place in the tax year which are subject to tax, but rather the apportioned profits of the relevant accounting periods. 

It is not yet clear exactly how software will handle the transition from quarterly updates to the taxable profit for the year, where a business does not have a 31 March or 5 April year-end. 

And that concludes our three-part series on basis period reform! If you missed any previous installations, please refer to the blog section on our website or the links within the article.  

If you would like to discuss any part with one of our advisors or need help with the transition, please contact our Commercial Client Director, Fabrice Legris, at fabrice.legris@fiandertovell.co.uk.  

Basis Period Reform: Understanding the Changes & Implications

Basis Period Reform: Understanding the Changes & Implications

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!