The UK tax system is undergoing significant changes with the introduction of the basis period reform (BPR), transitioning from the current year basis of assessment to a tax year basis for the 2024/25 tax year, with a transitional year in 2023/24.
This reform is aimed at simplifying the tax system for the self-employed, partnerships and others with trading income, aligning the taxation of trading income with other income types such as property and investment income.
In this guide, we present the key points related to the changes and what they may mean for you.
The reform objective
The primary objective behind the BPR is to establish a simpler, fairer and more transparent set of rules for trading income allocation to tax years.
Historically, businesses with different accounting dates could end up with vastly different taxable profits for the same tax year, creating a complex and often unfair system. The reform seeks to address these inconsistencies by aligning trading income taxation closer to the time profits are earned, facilitating easier tax saving and compliance while reducing tax debt write-offs.
Changes
Transition to tax year basis
From the 2024/25 tax year onwards, all business profits subject to income tax will be assessed on the profits arising within that tax year, regardless of the business’s accounting period. This marks a departure from the previous system, where businesses were taxed on the profits ending in the tax year. The 2023/24 tax year served as a transitional phase, with special rules applied to account for this shift.
Impact on businesses
Businesses that do not align their accounting periods with the tax year (6 April to 5 April) will need to pro-rate their results to fit the tax year. This may require using provisional figures when filing tax returns, which can be amended within the normal time limits. Notably, businesses are encouraged to consider aligning their accounting dates with 31 March or 5 April to simplify profit assessments and avoid the need for provisional figures.
Transitional period and overlap profits
The transitional period will see businesses paying tax on both the ‘current year” profits (for the 12 months to the end of their accounting period falling in 2023/24) and any profits made in the period up to 5 April 2024. This could potentially lead to a higher tax bill for the transition year, with HMRC providing relief measures to mitigate the impact. Overlap profits, a product of the old system, will be fully relieved in the 2023/24 tax year.
Preparing for the change
If you are affected by the BPR, you should take proactive steps to understand its impact on your business, manage cashflow implications, and consider whether changing your accounting date is appropriate.
Large partnerships and businesses with accounting periods later in the year face particular challenges due to shortened preparation timelines for tax returns. HMRC’s decision to allow amendments to provisional figures within the normal filing time limits offers some flexibility but also introduces additional administrative considerations.
Seek advice
The BPR represents a significant overhaul of the UK’s tax system for trading income, aiming to simplify the process and create a fairer system for all.
While the transition may present challenges, the long-term benefits of a simplified tax system align with the government’s goal of supporting businesses through clearer and more straightforward tax obligations.
If you are navigating these changes, seeking expert advice and consulting with tax professionals like Venthams can ensure compliance and optimal tax planning during this transition period and beyond.
Contact us for expert advice on managing these changes.