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Basis Period Reform

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HMRC’s Basis Period Reform for Taxing Personal Income of Self-Employed and Business Partnerships

HMRC, His Majesty's Revenue and Customs, has introduced changes and reform to the basis period for taxing the trading income of self-employed individuals and those in business partnerships.

What is the Basis Period?

The basis period is a defined timeframe used to calculate taxable profits for self-employed individuals and partners of partnerships. It determines the income that is subject to taxation in a given tax year and is related to the accounting period used for financial reporting, which may not always align with the tax year.

The Change:

Previously, the basis period was determined based on the accounting period ending within the tax year. However, HMRC has introduced a change that aligns the basis period with the tax year. This change aims to simplify the process and ensures consistency in calculating taxable income. It will mean that sole traders and partnerships will be taxed in the year business profits arise, regardless of the accounting year end – the tax year basis.

Who does it affect?

This change affects self-employed individuals and business partnerships whose accounting periods do not match the tax year (April 6th to April 5th). Individuals who have already adopted the tax year-end as their accounting period will not be affected by this change. Nor, by concession, will those who use a year end of 31 March.

When does it take effect?

The new basis period rules affect and relate to the tax year 2023/24 and this will be the transitional year which will bring about the changes in preparation for the new basis to be operational from 5 April 2024 and beyond. This means that those with an accounting period that is not already aligned with the tax year will be affected by this change in the 2023/24 transitional, and for every subsequent, year.

Considerations for those affected:

a.      Accounting period change:

If your accounting period currently does not align with the tax year, you may need to consider changing your accounting period. By aligning your accounting period with the tax year, you will simplify the tax calculations under the new rules in comparison to retaining your old accounting period.

b.     Adjustment for transition:

For the first year of implementation, a transitional adjustment will be required. This involves calculating taxable profits for the period from the end of your last accounting period to the beginning of the new tax year. For example, if you have a 30 September year end your taxable profits for the 2023/24 tax year will be based on both the full year to 30 September 2023 plus the short period from 1 October 2023 to 5 April 2024, approximately 18 months.

c.      Consult a tax professional:

Given the complexity of tax regulations, it is advisable to consult a tax professional or accountant to ensure a smooth transition and accurate calculations under the new basis period rules. Particularly because there are special provisions that apply in the 2023/24 transitional year to help mitigate the additional tax that is likely to arise in that year.

d.     Keep records:

Maintain accurate records of your accounting periods, financial transactions and any adjustments made during the transition. This will help ensure compliance and accurate tax reporting. The use of accounting software will also help with providing accurate in year figures for the short transitional period.

Future considerations: 

a.      Regular review:

As tax regulations and circumstances evolve, it's important to regularly review your accounting period to ensure compliance and optimal tax planning.

b.     Stay informed:

Stay up-to-date with any changes or updates from HMRC regarding basis periods and other tax-related matters. This will help you make informed decisions and remain compliant with the latest regulations.

HMRC's change in the basis period for taxing trading income of self-employed individuals and business partnerships aims to simplify tax calculations and ensure consistency. If you're affected by this change, consider the steps mentioned above to adapt and navigate the transition effectively. Consulting a tax professional is highly recommended to ensure accurate compliance with the new rules.

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