Basis Period Reform
12th July 2023
Currently for 2022/23 Self -Assessment tax returns, when Sole Traders and Partners are taxed on their Self-Employment profits, we use Tax Basis Period rules to decide which tax year the profits are assessed in.
This means your Self-Employment accounts are made up to the year-end date you chose at the commencement of trading, and each year the profits are taxed in full in a certain tax year.
From the 2024/25 tax year, HMRC will be introducing the Basis Period Reform which means you will now be taxed on your Self-Employment profits for the period 6 April – 5 April. This means you may have to apportion your Self-Employment profits if you don’t have a year-end of 31 March or 5 April (HMRC are happy to treat the 31 March year-end as a 5 April year-end).
2023/24 will be the transitional year, where we move from the old rules to the new rules. This means for the start of the tax year, you will be taxed like normal. However, we will then need to include profits to 5 April 2024. Then by the 2024/25 tax year, you will be on 6 April – 5 April basis. This could result in larger tax profits in 2023/24.
To alleviate the transition, if you have any overlap profits from the commencement of trading, where you were taxed twice due to the current Tax Basis Period rules, you will be allowed to use this as tax relief.
Please see an example below based off a 30 June year end:
It may be beneficial for some businesses to change their accounting year end to either 31 March or 5 April, however for other businesses they may have chosen their year-end date for a reason. If the year-end date isn’t changed, the profits will need to be apportioned each year to identify the amounts relating to the tax year.
At Whitings we are reviewing our Sole Trader and Partnership clients and if we haven’t been in contact already, we will be contacting you in the next few months about what option is best for you.
Have a question?
Get in touch with your local Whitings Office today
Disclaimer - All information in this post was correct at time of writing.
