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Basis Period Reform – What Sole Traders and Partners Need to Know
As of 6 April 2024, the UK government introduced reforms to the basis period rules – impacting how sole traders and partners calculate their taxable profits.
What is Basis Period Reform?
Basis Period Reform changes how taxable profits for unincorporated businesses (sole traders and partnerships) are calculated.
This tax reform mandates that all individuals will be taxed on business profits arising during the tax year instead of the business year end.
The reform aims to:
- Align tax reporting with other forms of tax
- Simplify the tax system
- Facilitate the implementation of Making Tax Digital, now set for 2026
Who is Impacted by Basis Period Reform?
From tax year 2024/25, sole traders and partnerships with accounting periods that do not end between 31 March to 5 April will be taxed on business profits within the tax year. Starting from tax year 2024/25 all individuals will be taxed on the business profits arising in the tax year. They must adjust to the new basis period, transitioning for the 2023/24 tax return, as profits will no longer be taxed based on the business’s accounting period.
The Transition Year is 2023/24 and serves as a period where:
- Taxable profits will be calculated from the end of the 2022/23 basis period to 5 April 2024.
- Any overlap profits from the business’s opening years will be deducted.
- This could cause a spike in taxable profits, especially for incomes between £100,000 and £125,140 due to personal allowance diminishing.
You can opt to:
- Spread transition profits over five years.
- Tax all transition profits in 2023/24.
Matters to consider include cash flow, personal allowance withdrawal, potential entry into higher tax bands, and future income tax rate changes.
Some individuals may have been double taxed during the early years of trading. They may qualify for HMRC’s overlap relief, which accountants can claim on your behalf.
Some businesses might struggle to adjust their accounting year-end to match the tax year, due to international ties, seasonal business patterns, or compliance obligations.
Practical Implications
Businesses with a year-end other than 31 March to 5 April will need to split profits from two periods to calculate taxes each year if the accounting year end is not aligned to the tax year end. This could lead to estimated figures for tax returns and adjusting later, leading to more work and higher costs for compliance.
Get in Touch
We can discuss options to help with the adjustment and ensure the calculation of profits is correct.
Ammu Chartered Accountants
10 Newton Terrace
G3 7PJ
0141 290 0262
ammu.uk
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