The lowdown on proposed changes to Basis Periods

4 February 2022

Changes ahead for Basis Periods

In 2021, HMRC proposed that from 2023/24, tax on business profits will be based on the tax year itself irrespective of the accounts date. 2022/23 would be a year of transition with adjustments made to profits, ensuring the basis of taxation is aligned from 6th April 2023.

This has now been delayed until 2024/25 with 2023 as the transitional year.

In its impact assessment, HMRC indicates there’ll be a £1.7bn tax inflow by 2027 as the change of basis ‘beds in’.

The reason for this change? According to HMRC, to simplify the basis of taxation particularly regarding initial years of trading.

Basis periods: The period for which a sole trader or partnership pays tax each year.

The lowdown on the proposed changes

A self-employed individual or partner in a partnership, trust or other entity which has business income subject to income tax, is currently taxed with regard to the accounts which fall within a tax year.

For example, if an individual’s accounts end on 30th June, the Fortus team will prepare the 2020/21 tax return and we’ll include the profits for the period ended 30th June 2020 (not the tax year). This is known as the current year basis.

What about the practical implications?

For a business with a 31st March or 5th April year end, there’ll be no change.

For any other accounting date, or for a business that’s just started, the proposals if enacted, will mean the basis of taxation changes.

The change to a tax year basis will mean a transitional year for many sole traders and partnerships who don’t use 31st March or 5th April as their accounting date.

This could mean tax liabilities are brought forward for many.

It’s likely the move to the proposed rules will be anything but a simplification, especially as business owners consider when to change their accounting date.

Depending on your business’s future plans, there may be long-term implications to consider, such as overlapping profits, additional administrative burden, reducing payments on account (POAs), and tracking credit for foreign tax for international businesses.

While it’s a challenge to face, it doesn’t have to be faced alone and we would recommend early planning. We’re here to talk through your financial projections, advise on the best steps and guide you through what’s to come.

It’s time to make hay while the sun shines.