It sounds entirely shoulder-shruggable: but basis period reform is like the bits under the bonnet. It makes the car go. In this case, it helps determine the tax bill.
Your tax liability may be higher
Basis period reform is a change that affects unincorporated businesses only – not companies. Within that group, it only affects businesses that donʼt use a 31 March or 5 April year end. You may have seen it called a change to the ʻtax year basisʼ – because what it does is change the way that your trading income is allocated to tax years:
- until now, if youʼre an ongoing trader, the rules have been based on the accounting date of your business
- from 6 April 2024, they are based on the tax year
- the change will impact you before 2024
- this is because the current tax year (2023/24) is a transition year, with its own rules about how profits are calculated
- this directly affects the amount of tax paid.
In short, if your business doesnʼt have an accounting year ending on 31 March or 5 April, the tax calculation this year is based on a longer period than usual. Itʼs based not just on the profits to the end of your normal accounting period: but also on a proportion of the profits from the end of your accounting year up to 5 April 2024 – the date that the new tax year basis begins. Clearly this is likely to mean higher tax
bills in 2023/24. It also affects the following four years. The impact of this on cash flow will need consideration.
Example
- PQR has an accounting year running to 30 September 2023
- heʼs taxed on profits for the year to 30 September 2023 plus
- a proportion of the profits for 1 October 2023 to 5 April 2024 as well.
This isnʼt necessarily the end of the story. Your individual mix of income will also affect how much tax you pay. For some people, the change could also mean the need to think about the possibility of the personal allowance being restricted, as occurs if adjusted net income is more than £100,000.
What can be done about it?
The good news is that routine tax planning strategies such as pension planning, Gift Aid donations and careful allocation of profits
between family members, may all be available to help.
There are also two primary reliefs to help lessen the impact of higher tax bills:
- spreading relief: businesses with higher profits in 2023/24 because of the change will automatically have their additional ʻprofitʼ spread over five years. This is something you can opt out of, and we can help you decide on the best route for your business
- overlap relief: historically, what are called overlap profits can arise in the first years of trade, with adjustments to the tax bill made when the business ceases. Any overlap relief your business is due must be used now or it will be lost.
Getting the appropriate figure for overlap relief may not be straightforward in every case: for example, where HMRC does not have a record of this from previous tax returns; or where businesses have changed their accountants. Partnerships have their own complications, with each partner having their own figure for overlap relief. These are all things we will discuss with you.
It doesnʼt stop there
The change also affects the yearly preparation of accounts and tax returns. In future, information from two sets of accounts, not one, will have to feed into the tax return, adding to the work done. Many businesses in this position will need to submit provisional figures, with adjustments made later, probably in the following yearʼs return.
The solution for some businesses is a change of accounting year end, moving to 31 March. It will not be the case for every business, particularly where there are compelling commercial reasons to use a different year-end, such as 31 December. This is also something we will review with you.
Basis period reform will be experienced as quite a disruption for many businesses.
If you would like more information or any advice on this article then please get in touch with us on 01295 250401 or email solutions@ellacotts.co.uk. You can also contact us here with your query and we will get back to you.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
