What are basis periods?
Generally, businesses draw up annual accounts to the same date each year, called their ‘accounting date’. Currently, a business’s profit or loss for a tax year is usually the profit or loss for the year up to the accounting date in the tax year, called the ‘basis period’. Specific rules determine the basis period in certain cases, including during the early years of trading. These rules can create overlapping basis periods, which charge tax on profits twice and generate corresponding ‘overlap relief’ which is usually given on cessation of the business. Overall, this basis of taxation is called the ‘current year basis’.
What are the new basis period rules?
The changes to the basis of assessment of self-employed profits which are scheduled to be implemented from 6th April 2024, mean that profits (and losses) will be assessed based on the amounts arising between 6th April and 5th April instead of the profit / loss of an accounting period ending in the tax year.
This means that where the business accounts do not coincide with tax year, the profits or losses will need to be apportioned. This is intended to coincide with the start of Making Tax Digital for income tax.
How will the changes to basis periods affect self-employed workers?
Transitional rules proposed for the previous 2023/24 tax year could result in large tax bills for some self-employed sole traders and partners, particularly those with an existing 30th April year end. The profits of year ended 30th April 2022 would be taxed in 2022/23 under the current rules with 2024/25 taxing profits arising between 6th April 2024 and 5th April 2025 under the new rules. But what about 2023/24?
The profits taxed in 2023/24 would be those for year ended 30th April 2023 PLUS the period 1st May 2023 to 5th April 2024 - in total 23 months profits!
Will there be any support for self-employed workers with larger tax bills?
The good news is that there would be a deduction for “overlap relief” (as much as 11 months) which typically arose when profits were taxed twice at the start of the business - but those will often be much lower than the extra 11 months being taxed in 2023/24.
The transitional provisions will also provide for the “excess” profits to be spread over the next 5 tax years to smooth out the excessive tax bill.
LWA are here to help
If your annual accounts are drawn up to a date different to 31st March or 5 April and you think you may be affected by the Basis Period Reforms, speak to your accountant or personal tax advisor. Our Tax Manager, Nickie Antley-Slater and her team are able to help you with advice based on information you can provide about your income and employment. Call us on 0161 905 1801 in Manchester or 01925 830 830 in Warrington, or you can email email@example.com.