Tax
BASIS PERIOD
What do HMRC’s changes to the basis period rules mean?
HMRC is changing the rules around the basis periods businesses use for their reporting for tax purposes. Robert Salter sets out its impact
The key points
THE RULES APPLY FOR ALL BUSINESSES
All businesses must use April-March tax years under the new rules
ESTABLISHED BUSINESSES MOST AFFECTED
Existing businesses will need to transition
CASH FLOW ISSUES MAY FOLLOW
Seasonal businesses may have to estimate and restate reported figures
Many accountants and advisers will have heard that the rules about ‘basis periods’ are changing, with HMRC insisting that businesses start reporting their profits (and losses) based on the UK tax year from April 2024 onwards. In practice, however, while the UK tax year runs from 6 April to the following 5 April, under the rules, HMRC would accept those businesses which use a 31 March year end as an alternative to the official tax year-end from a basis period perspective. Indeed, 1-4 April would also be acceptable as a new year-end for HMRC under these changes, though in practice 99% of affected businesses will use either 31 March or 5 April as their year end in practice.
Q So what does this mean in practice?
Firstly, when considering what businesses or companies are impacted by these changes, it is important to realise that it is only self-employed traders, partnerships and limited liability partnerships that will be affected. The rules are not changing for limited companies.
Moreover, clearly many established businesses or traders in the above groups will actually always have used either a 31 March or 5 April year end for their accounting and tax reporting obligations. The new rules will have no impact — they can simply continue as if nothing has changed.
Q What should one do for new businesses from an accounting period/basis period perspective?
Although it has long been accepted that any new unincorporated business can choose its own year end, in practice with the new rules coming into force fully from April 2024 onwards (and 2023/24 being the official ‘transition year’), it is clearly appropriate that any new businesses (and in this regard, this could include sole traders and unincorporated businesses that have been trading for up to 10-11 months already, for example) look at having a formal basis period year end of either the 31 March or 5 April year end. This means, for example, where such a business – say a business which started trading on 1 July 2023 – might have traditionally had an accounting year end/basis period of 30 June 2024, would now simply have a 31 March (or 5 April) year end. This would mean it simply reports its income and expenses and net profit/loss for the period ended 31 March 2024 on the individual trader’s 2023/24 self-assessment tax return.
Q What about established businesses that have been trading for a year or more already?
The issues associated with HMRC’s changes to the basis period rules fundamentally impact those unincorporated businesses which have been operating for 12 months or more and which have used an accounting period which is different from the UK tax year end. These businesses will need to treat their reporting for the 2023/24 UK tax year on a ‘transitional basis’. This means that in the 2023/24 tax year, a business which had, for example, a tax year end of 30 September 2023, and would have used that year end as the basis for reporting the profits (or losses) on the individual 2023/24 self-assessment tax returns, would now need to:
- Report the profit for the accounting year ended 30 September 2023 (this profit hasn’t previously been reported for tax purposes); and also
- Now report the profit associated with the period 1 October 2023-31 March 2024 (or 5 April 2024)
As such, the 2023/24 tax year would in this example result in the self-employed trader having to report 18 months’ income in one tax year. Realistically in some cases, where the trader has had, for example, a 30 April year end historically, they could end up having to report 23 months’ profits in the one tax year.
Clearly the above requirements are likely to push many self-employed taxpayers into higher rates of tax than would be the case in a ‘normal tax year’. As such, HMRC’s rules do provide some reliefs and transitional arrangements including:
• The ability to spread the ‘excess profit’ over five years for tax purposes; and
• Relief for any overlap profits which have been brought forward from earlier years.
Q So what does this look like?
The following shows how the reliefs and additional income/profit reporting could look like in practice:
The extra profit for the year of £30,000 would in the first instance be fully taxable as part of the 2023/24 self-assessment tax return. However, the rules do allow this excess profit to be ‘spread’ over five years.
Q So what?
As with any change to the tax system, it is perfectly right to ask: ‘So what?’ That is, what does this mean to me and my clients? Sadly, as one would expect when it comes to tax, there is unlikely to be one simple, straightforward answer in this regard.
Moreover, some businesses that use an alternative year end will not suffer any major implications from the basis period reform. For example, Mr Gelato, who has an ice cream van and a 31 December year end, actually makes 99% or more of his annual profits between April and October every year. As such, the obligation to report some additional income/costs covering the period from 1 January 2024-31 March 2024 is unlikely to make any substantive difference to the income/profit which needs to be reported on his 2023/24 self-assessment tax return.
Conclusion
In practice, it probably isn’t possible for taxpayers to avoid all the hiccups and challenges associated with the reform to the basis periods. However, clearly it is still important to have meaningful discussions on the issues that these changes bring, to avoid being shocked by the changes when it comes, for example, to the submission of 2023/24 UK tax returns.
