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Basis period tax reporting – HMRC clarifies rules

In the Autumn Budget 2021, the government announced that it was reforming the way trading profits are allocated to tax years for income tax purposes.  The changes were then legislated in Finance Act 2022.

On 31 July the government issued further guidance on the changes which affect self-employed sole traders and partnerships.

To read in detail about what’s behind the change, who is affected and the new rules read our previous article here.


In summary

The basis period tax reform affects partnerships and self-employed individuals whose accounting year does not end on or between 31 March and 5 April.

Up to 5 April 2023, the basis period reporting rules applied which meant that profits were reported in line with the business accounting year end date within the relevant tax year.

From 6 April 2023, the new tax year basis applies which means that profits will need to be reported up to the tax year end, even if the accounting year ends at a different time. This means that profits may need to be apportioned between accounting periods.


Transition year

The 2023-24 tax year is the ‘transition year’. This means sole traders and partnerships will have to:

  • report profits covering more than one year; and
  • may need to apportion two sets of accounts to estimate the profits for the year.

As an example, those with an accounting year end date of 31 December 2022 will need to report profits from 1 January 2023 to 5 April 2024 in the 2023-24 tax year.

Where the reported profits cover more than 12 months, the excess is known as ‘transition profit’ which can be reduced by overlap relief and any remaining profit can be spread over the following years, up to the tax year 2027-28.

HMRC has not yet published guidance about how to deal with overlap relief but said it planned to do so ‘shortly’.

If the business’ accounting year ends on or between 31 March to 4 April, then the accounting year can be treated as if it ends on 5 April and profits can be reported without apportioning for the five days after 31 March.

The full guidance issued recently by HMRC can be found here.


Should you change year end?

The transitional year rules could see a temporary increase in the tax payable by businesses which don’t have a year end of 31 March or 5 April. Also, these businesses may experience ongoing additional administrative burdens going forward.

There will be additional work for each tax return, because the amounts from two separate sets of accounts will need to be combined. Also, depending on how late the accounting date falls, the second set of accounts might not be available by the time the tax return is due and so profits would need to be estimated.

In view of this, businesses might consider changing their accounting date to 31 March or 5 April which can be done by drawing up a set of accounts for a longer or shorter period than usual, ending with the new accounting date.

However, it’s important to consider what is best for your business overall alongside the tax issues and if you need our help get in touch.

Basis period tax

The information was correct at time of publishing but may now be out of date.

Posted by Cowgills
16th August, 2023
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