What is the Basis Period Reform?

Understanding your tax liabilities while self-employed or as a sole trader can be daunting, and one aspect that often causes anxiety is annual submission responsibility. And from the 2024/25 tax year, new reforms may mean it could get even more confusing… But we’re here to lay it out straight for you. So what are the new Basis Period Reforms, and what will they mean for you and your business?

Currently, anyone who is working in self-employment reports their profits and losses on what is known as a current year basis; that is to say that a business will prepare its accounts based on its pre-determined accounting period. For example, if Business X Ltd whose accounting date lies on 30th September is preparing accounts for the 2020/21 tax year, the returns will cover 1 October 2019 to 30 September 2020. Simple.

But, from 6th April 2024, however, this will change.

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The Big Alignment and the Necessary Transition

HMRC are instituting reforms to bring profit and loss reporting periods in line with the tax year (between 6th April and 5th April annually), with the self-assessment submission deadline the following 31st January, in preparation for Making Tax Digital, the UK government’s plan to create a more digitally advanced tax system and make it easier for sole traders and businesses to keep on top of their tax responsibilities.

The tax year 2023/24 will be a transition year, in which accounts will have to cover both the accounting period and the period of accounts between the accounting date and the end of the tax year. If we take Business X Ltd as an example, their 2022/23 tax year will be as normal, reporting profits and losses between 1 October 2021 and 30 September 2022 on 31st January 2024. Tax year 2023/24, however, will incorporate accounts from 1st October 2022 to 30 September 2023, plus from 1 October 2023 to 5 April 2024, and with a deadline of 31st January 2025.

The transition year of 2023/24 may mean many businesses will have to report profits and losses for a period longer than 12 months. HMRC have said, however, the extra profits calculated between the end of the accounting period and the end of the tax year can be spread over five years.

From tax year 2024/25, taxes will be paid on a tax year basis, taking proportions of each accounting year’s profits and losses to cover the tax year. For instance, Business X’s 2024/25 tax year reporting will cover a percentage of the year between the start of the tax year to the end of the 2023/24 accounting year (i.e. 178 days, so 178/365), and the start of the 2024/25 accounting year to the end of the tax year (187 days, so 187/368). These will be reported by 31st January 2026.

Transitions to these reforms can cause complications depending on accounting dates. Businesses with an accounting date between 31 March and 5 April will see little to no change. However if an accounting date lies between 31 January and 28 February, this may see issues.

For example, Business Y LLP’s accounting date lies on 28th February. Under the new system, their accounts for the tax year won’t be finalized until the after the deadline for self-assessments. HMRC are currently looking into solutions for these issues such as allowing for amendments of returns, or allowing the inclusion of the difference between predicted and actual profit and loss figures, during the following year’s submissions or extending the deadline for business with January and February accounting dates.

There is a lot of work to be done for businesses to prepare for Making Tax Digital, and each individual or business’ circumstances will differ. If you need more advice on getting ready for the changes, visit Gov.uk or give Ezyco Accounts a call. Our qualified accounts advisors will be more than happy to help!


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