24 May 2022

Basis Period Reform - What do you need to be aware of?


Personal Tax Planning,

Corporate Tax Planning

Basis Period Reform

The government have confirmed their plans for a change in the rules that decide when income is taxed for businesses, including the self-employed, partnerships and trusts.

Those who draw up their accounts to 31 March or 5 April will not be affected by the changes, as the basis period is in line with the tax year end (5 April).

However, for those who draw up their accounts to a different date, there are a different set of rules that dictate how and when profits are taxed. These rules can mean that in early years of trading, some profits can be taxed twice (“overlap profits”). Such profits are carried forward and can be used when a trade ceases or a change of accounting date takes place.

The government want to simplify the rules surrounding this with and align business profits or losses that are made in the tax year to be assessed in the tax year, rather than being based on the accounting year end of the business. This will also assist the government with their plans to implement Making Tax Digital for Income Tax, which will be the topic of a separate blog in due course.

Profits – How will they be Apportioned?

You will still be able to choose your accounting date and you will not have to change this to match the tax year end. However, for tax purposes you will need to apportion profits and losses into each tax year. This could prove difficult for businesses with fluctuating profits and cause extra administrative issues.

If a business has an accounting year that ends later in the year it will be less likely they will have up to date profit figures available before the filing deadline and these businesses will have to file their returns using estimated figures and then amend their return once the final figures are known.

Transition Period

There will be a transition period starting from 6 April 2023, as it has been identified that the move to a tax year basis for assessing profits could potentially accelerate tax liabilities for some businesses.

During 2023/24 only, affected businesses will be taxed on their profits for the 12 months starting from the end of the last basis period that falls in the 2022/23 tax year plus a transitional element which runs from the end of that period to 5 April 2024.

The transitional profit element will automatically be spread over five years and you will have the option to elect to bring forward some or all of those profits if you choose. Any overlap relief available from earlier years will used in the transition period.

Change of accounting date

A change of accounting date could be considered to ease the impact of these changes. However this is not always the answer. In addition, there will be no spreading of the transitional profits if a change of accounting date takes place before the transition period (2023/24).

Haines Watts in East Anglia has set up a dedicated team to keep up to date with these changes and will be contacting affected businesses, but if you have any immediate concerns please feel free to get in touch straight away.