The basis period reform was announced as part of the Autumn Budget in 2021.
This change will affect you if you are self-employed, part of a partnership or and LLP that currently don’t prepare their taxes in line with the traditional tax year of April to April.
The purpose of this change is to simplify the reporting to bring all profits to be reported in line with the tax year, rather than at separate points in the tax year which can create what is referred to as overlap profits.
Despite being announced back in 2021, the 2023/24 tax year is the first to be affected but this change. This period will be referred to as the “transitional period”.
In this transitional period you will be required to:
- Report your profits for the accounting period that falls within the tax year as you would normally do – this is called the “standard part”
- Report your profits that fall since the date of the standard part, through to the end of the tax year – this is called the “transitional part”
For businesses that made a profit in their initial reporting periods, this may have created what is referred to overlap profit. This effectively was the profit that was used in both the initial period and then the following period.
Under the old rules if this existed then this would be relievable at the time that the business ceased to trade. With the new rules in place, this will be offset in this transitional year against the transitional profits that are calculated.
As part of the transitional period, the net effect of the transitional period less any overlap profit can be spread over up to 5 tax years – so across the 2023/24 to 2027/28 tax years. Although spreading the transitional profits equally over the 5 year periods may be the least impactful where profits remain consistent, it isn’t compulsory so can be accelerated if beneficial to you as the taxpayer.
Like with any change that gets implemented to your tax, the calculation of this and the measurement of the impact to you is important to assess.
Some key areas where this may affect you…
- Increased taxes, as this is potentially bring additional income into the tax periods over the transitional period.
- With more income potentially being reported then this may cause you to go up through the various tax bandings, meaning a proportion of your tax falls into higher rates.
There is some goods news that it has been confirmed that transitional profits will not affect what is referred to as adjusted net income, this is the income adjustment which is taken into account for things such as retention of your personal allowance and the thresholds on which the high income child benefit charge. This is also the case for higher earners who may be affected by the annual allowance charge on pension contributions.
HMRC’s desire is that businesses will look to align their year ends with the 31st March or 5th April, but this may not be of benefit to the taxpayer, so your individual circumstances need to be taken into account. This is also the case if you are potentially looking to incorporate your business into a limited company structure.
If you are unsure how this change may affect your 2023/24 return or future periods, then please reach out to the team here and we would be pleased to help.
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