On January 27, 2022, HMRC and the government proposed changes to basis period reform rules starting in April 2024, in response to feedback from BDO and others.
These changes aim to address unfair impacts, yet they may still lead to accelerated tax obligations for many partnership members.
Who’s Affected?
This reform affects self-employed traders, partners in trading partnerships, unincorporated entities like trading trusts, estates, and non-resident companies with trading income under Income Tax.
It impacts businesses with annual accounts ending on dates other than March 31 or April 5, particularly seasonal and large partnerships, and those commencing after April 6, 2024.
What’s Changing?
Currently, businesses calculate profit or loss based on their accounting date, called the ‘basis period.’ The transition from the current year basis to the tax year basis in 2024-2025 removes basis period rules, avoiding additional overlap relief.
During the transition, all businesses’ basis periods align with the tax year, addressing any outstanding overlap relief.
Implications for Self-Employed Individuals:
Those with accounting periods aligning with the tax year remain unaffected.
However, those with different accounting periods may need to submit estimated profits for part of their period using HMRC’s guidance. Accountants and bookkeepers should be prepared to assist clients with this change.
Impact on Partnerships:
The reform may affect partnership cash flow depending on partners’ decisions regarding transitional period profits. Accountants and bookkeepers should conduct cash flow modelling to explore outcomes and determine the best approach for clients.
How Can We Help?
This article offers a simplified explanation of basis period reform. For more information, please get in touch with our friendly team!