The way businesses report their earnings is changing, with the government rolling out the basis period reform. The result of the basis period reform is that sole traders and partners who don’t currently align their accounting period with the end of the tax year could face tax bills larger than expected from January 2025. Businesses with a year-end accounting date that isn’t between 31 March and 5 April are most likely to be affected.
That might all sound quite confusing, which is why we’ve written this article, which explains everything you need to know about the basis period and its reform.
What is the basis period reform?
From the 2024/25 tax year, the basis period reform requires businesses to report the profit or loss they receive within the tax year, regardless of a business’s accounting date. Companies are not affected by this change.
What does that mean? A business’s profit or loss usually refers to the profit or loss a business made in the tax year, which starts on 6 April of a given year and ends on April 5 of the next year. This is known as the basis period.
A business’s accounting date is slightly different, as it gets to choose the period of time in which it reports its profit and loss. However, most small businesses set their accounting date as 5 April (the end of the tax year) to simplify things.
However, the tax year doesn’t work well for all businesses. For example, some businesses prefer to align their accounting year-end with their operational cycle—think retail businesses, which might end their financial year after a busy December and during a quiet January.
These businesses have overlapping basis periods, which makes paying taxes complex. In fact, many end up paying a portion of tax twice and have to claim overlap relief—assuming that they realise they can make this claim in the first place. Others make errors on their returns, increasing the national tax gap.
The reform eliminates this by requiring all businesses to report their profit and loss arising between 6 April and 5 April of the following year.
How might that impact you?
HMRC has estimated that around 280,000 sole traders will be affected by the changes introduced by the basis period reform, many of whom are probably unaware of how their tax bill will be calculated for the 2023/24 tax year, due for many on 31 January 2025.
The big worry is that many could face higher than expected tax bills as they could pay tax on more than 12 months of profit during the transitional year; for example, businesses with a 30 April year-end will pay on 23 months of profits.
As we said earlier, businesses with year-end accounting dates other than 31 March and 5 April will most likely be affected. What we mean by that is that these businesses might find themselves having more than 12 months’ profits taken into account, resulting in a higher tax bill.
But it’s not all bad news: you can include overlap in your 2023/24 tax return. You can do that by following the government’s guidance on overlap relief.
Do you need help with your tax return?
If you’re a sole trader or in a business partnership and think you might be impacted by the basis period reform, get in touch. We’ll help you through this transitional year—and beyond it. Taxes can be complicated, and we would be happy to help you.
Get in touch with us about your taxes today.
