What is the “basis period reform” and how could it affect you?

Heard of the “basis period reform”? Maybe you haven’t, even though much has been written about it. Admittedly, it sounds rather technical and dull, and in some ways it is.

But if you run a business that pays tax via Self Assessment, the basis period reform could affect you, as it may impact the way you report your profits to HMRC for the 2023/24 tax year onwards. If you’re not careful, you could even end up paying more tax than necessary.

So, what is the basis period reform, what changes will it bring and what key facts do you really need to know about it?

Why is the basis period reform being introduced?

HMRC says the basis period reform is being introduced “to create a simpler, fairer and more transparent set of rules for allocating trading income to tax years”. Currently, as it explains, “two businesses that are identical except for their accounting date may have very different taxable profits for a tax year”. The reform to tax year basis will remove this difference, “leading to fairer outcomes between businesses” says HMRC.

Who exactly will be affected by the basis period reform?     

The basis period reform won’t affect all sole traders and ordinary partnerships  members, just those that draw up annual accounts to a date that isn’t between 31 March and 5 April (which HMRC describes as “mainly seasonal businesses and large partnerships”).

The change could also impact trading trusts and estates and non-resident companies with trading income that’s subject to Income Tax. The basis period reform will also affect businesses started on or after 6 April 2024, from which date profits will be taxed in the tax year in which they arise.

Need to know! Sole traders and members of ordinary partnerships with a 31 March-5 April accounting year-end will not be affected by the basis period reform – unless they have unused overlap relief.

What is overlap relief?

• Overlap relief can be used to reduce your taxable business profits. Overlap relief is based on “overlap profits”, which can arise if your business has not always used an accounting-period end that falls between 31 March and 5 April.
• Overlap profits can arise in the first two or three years of a business or in any year during which there is a change of accounting date.

Need to know! If you have overlap profits, you need to use all of your overlap relief in the 2023/24 transition period, because if you don’t, you’ll lose it. It cannot be used after 5 April 2024, even if you now have an accounting period that ends between 31 March and 5 April.    

How will businesses be affected by the basis period reform?

• Introduction of the basis period reform means all sole traders and ordinary partnership members will need to report their business tax information to HMRC on a tax-year basis (ie 6 April until the following 5 April), regardless of what their accounting period is.
• This will mean that some sole traders and ordinary partnership members will need to change how they report their profits to HMRC for tax purposes for the 2023/24 tax year and subsequent tax years.

When is the basis period reform being introduced?

The new rules will mean that from 2024/25, all unincorporated businesses will be taxed on income generated between the start and end of the UK tax year (ie 6 April to 5 April). This will be the case, regardless of the year-end to which the business prepares its accounts.

Many sole traders and members of ordinary business partnerships don’t currently prepare their accounts to 5 April, so the 2023/24 tax year (6 April 2023-5 April 2024) will be a transition period until the new rules are introduced in April 2024.

When and how to include Overlap Relief in your 2023-24 tax return

Visit government website GOV.uk to read recently published HMRC guidance on when and how to include “Overlap Relief” in your 2023-24 Self Assessment tax return, if you have transition profit. You can also find out how to contact HMRC to find out your Overlap Relief figure. It can take up to three weeks to hear back from HMRC (longer if your tax circumstances are more complex.

Where can you find out more about the basis period reform?

Gov.uk also provides more information on the background to the basis period reform.

Watch our short video on basis period reform

Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.