Basis Reform Period for Affected Clients
Important changes that may affect your business.
As previously advised HMRC is changing the way taxable profits are calculated. At the moment, unincorporated businesses such as yours are taxed on a ‘current year basis’, but starting from April the tax year 2024/25 will be moving to a ‘tax year basis’.
If your business currently does not prepare your accounts to 5 April, the 2023/24 tax year (6 April 2023 to 5 April 2024) will be a transition period to the new basis of assessing profits. This is essentially a ‘catch-up’ year, which will advance tax liabilities for many.
In this period, your businesses will pay tax on any ‘current year’ profit as it did previously (i.e. for the 12 months to the end of their accounting period which falls in 2023/24) but in addition, there may also be a need to pay tax on any profits made in the period between the end of the accounting year and 5 April 2024 (transitional profits).
Depending on your business’s accounting period, this could mean paying tax on up to two years’ worth of profits at once. For example, businesses with a 1 May - 30 April accounting period could end up paying tax on 23 months’ worth of profits (profits from the period 1 May 2022 to 30 April 2023 plus profits from 1 May 2023 to 5 April 2024.)
HMRC recognises the additional burden this could place on businesses and will therefore automatically spread the transitional profit (that’s the profit generated in the period between the accounting period end and the end of the tax year) over the next five tax years so that the cash flow impact is reduced. In addition to this, you may be able to reduce the amount of transitional profits you pay tax on by deducting any overlap profits your business may have generated in the past
When your business first started trading, some profits may have been taxed twice. This is normal under the old rules and you should have a record of this. If your business does have overlap profits, these can be deducted from the transitional profits and could ultimately reduce the amount tax you pay.
HMRC is looking at ways of providing overlap relief figures direct to taxpayers and their tax advisors and they have confirmed that requests will be handled by a dedicated team in HMRC. I have this morning contacted HMRC and requested the figures where we do not already hold on file.
These changes should not affect the level of your income that is used to calculate things like your entitlement to certain reliefs and benefits (such as Child Benefit, pension contributions etc): the transitional profit will now create a ‘stand-alone tax charge
The key point here is that this is an acceleration of income tax payments and not an additional income tax charge.
If your business is affected by the basis period reform, the most important thing to do is plan ahead. Transitional profits may mean you need to pay more tax in relation to 2023/24 than initially expected so it’s important to ensure you have enough money set aside to cover this.
Should you wish to read more HMRC’s Business Income Manual contains detailed information about basis period reform and how profits are calculated in the transition period (2023/24 tax year) and how tax is calculated when there are ‘transition part’ profits during the 2023/24 to 2027/28 tax years.
Basis period reform is part of the MTD for ITSA rules that will apply from April 2026, but you could save time in the long run by starting preparing for upcoming changes and the transition is likely to run more smoothly if you start preparing ASAP.
