Basis Period Reform – Does it affect me? What does it mean?

What does it mean?

• It affects sole traders and partnerships that historically had an accounting year end that is not 31 March or 5 April.

• It will likely mean higher tax bills from January 2025.

• Work with an accountant to understand the impact and plan the best approach for you.

How will Basis Period Reform affect me?

Basis Period Reform is changing how things work from the 2023/24 tax year for sole traders and partnerships. It does not affect those trading through a limited company.

The policy ensures that everyone’s accounting period matches with the tax year end. Which sounds straightforward, but if your accounts are prepared up to any date other than 31 March or 5 April, the transition to the new regime will likely result in higher tax bills than normal for you.

• It affects sole traders and partnerships that historically had an accounting year end that is not 31 March or 5 April.

• It will likely mean higher tax bills from January 2025.

• Work with an accountant to understand the impact and plan the best approach for you.

What should I do now to prepare?

• Check your historic accounting year end: If it is not 31 March or 5 April, and you are a sole trader or partnership (not a limited company) this affects you.

• Get your accounts ready: To prepare for this change, the best thing you can do is get your accounts finalised as soon as possible. Early preparation gives you a clear picture of your upcoming tax liability, allowing you to plan and manage your finances effectively.

• Plan how to tax the transition profits: An accountant can assist with this and help you find the right balance between managing your overall tax liabilities and deferring tax payments.

• Manage your cash flow: Start planning how to manage your cash flow to ensure you have enough set aside for tax payments.

• Stay informed: We provide a service that helps your business achieve commercial success. Our quarterly strategy meetings enable you to know your numbers, truly understand the performance of the business and forecast tax bills 18 months in advance.  

The basis period reform could mean a significantly higher tax payment is due on 31 January 2025 and beyond. If you’re not prepared, this could have a serious impact on your cash flow. The key is to act now to avoid getting caught out.

I’d like to understand the technical detail – can you give an example?

If you previously prepared accounts to 30 September, you would likely have reported the year ended 30 September 2022 on your 22/23 tax return.

When your tax return for 23/24 is prepared. This income reported will be as follows:

• You will be taxed on profits from you usual 12-month period to 30 September 2023.

• You will also be taxed on 20% of your ‘transition profits’.

This means you will be taxed on more than 12-months profits. Meaning a higher tax bill.

Your transition profits are the profits earned in the 6 months to 31 March 2024 less a deduction for any ‘overlap’ profits which were taxed twice when you originally started trading. Often these overlap profits are lower especially if you have been trading for many years – meaning higher taxable profits.

The amount of additional tax payable will vary significantly for everyone depending on their personal circumstances but as an example, one of our clients who began trading many years ago and now runs a very successful business, had an additional liability of £35,000 due in January 2025. Advance notice of this liability was key to give them time to plan, mitigate and save for this additional tax. 

The default position is that 20% of these transition profits will be taxed each year for 5 years although it is possible to elect to accelerate the transition profits brought into account in any one year. It might be more tax efficient to elect to pay tax transition profits earlier depending on your taxable income in any given year. We would highly recommend getting professional advice. 

Don’t delay – act now

The Basis Period Reform is a significant shift therefore get prepared as soon as possible. We are here to support you through these changes. If you want to learn more about how this will affect your business, please contact us.