Basis Period reform

Basis Period reform
21st February 2022 Debbie

Currently sole traders and partnerships are taxed on the accounting profits for the year ending in the tax year – eg, year ended 31 December 2019 profits are taxed in the tax year ended 5 April 2020.

The basis period is to be changed to the tax year – so although a business can keep its year end the profits will be prorated to the tax year, from 2024-25.

Those with 31 March and 5 April year ends will see no change.  Note a 31 March year end is considered the same as 5 April by HMRC.

The change will create a transition year for 2023-24.

Firstly, the taxable profit is calculated based on the old basis of the year ending in the tax year 2023-24.

There is a “transitional amount” – the proportion of the profits in the next accounting period that covers the period from the beginning of the accounting period to the end of the tax year 5 April 2024.

From this is deducted any overlap relief – which arises when an individual starts to trade or joins a partnership and the year end for the business is not aligned with the tax year, some profits are taxed twice – in the first and second tax years of trading. These profits are ‘overlap profits’.

The transitional amount less overlap relief is divided by 5 and added to the taxable profit figures each year for 5 years from 2023-24.  Note there are different rules were the transitional amount and overlap relief create a loss – this is treated like a terminal loss – and can be carried back 3 years.