What is Basis Period Reform and Does It Affect You?

Sorting out your taxes as a sole trader can be pretty challenging, however, there are now big changes on the horizon that could be about to make your life easier but will need some planning to prepare for. These changes, connected to the broader introduction of Making Tax Digital (MTD), aim to simplify tax calculations for businesses, particularly regarding basis periods.  

In this blog, we will delve into the details of the basis period reform, explaining how it works and what steps sole traders need to take to get prepared.  

Understanding basis periods 

Before we jump into the changes that are on the way, let’s quickly go over basis periods. Basis periods are specific timeframes during which businesses calculate their taxable income. 

When you set up a business, you have to choose an accounting date. This date is the point in every year when you draw up your books and do tasks like working out your taxes. The majority of people default to the tax year to decide their accounting date—5th April. This means that the accounting period is 6th April to 5th April the following year.  

However, there are some people who have chosen to have different basis periods, and that is what this reform will be aimed at. 

The new basis period rules 

From 2024/25 onwards, new rules say that all unincorporated businesses will be taxed on the money they make between April 6th and April 5th, regardless of when they usually finish their yearly accounts.  

The impending reforms primarily target businesses with accounting dates and periods that don’t align with the tax year (e.g. accounting periods not falling between 6th April to 5th April). This poses challenges for MTD systems, which is a key factor behind the changes.  

The changes are designed to bring all businesses into the same quarter for tax returns, making it more manageable for MTD systems to process the information efficiently. While the full implementation of MTD has been pushed back to 2026, the basis period reform is expected to be in place by then, indicating forward planning by HMRC. 

Partnerships and sole traders take note 

It’s important to highlight that these reforms specifically impact partnerships and sole traders. Established sole traders and partnerships with different year ends compared to the tax year end will be affected. However, this won’t be a concern for all sole traders and partnerships, for example, at Trinity we only have 2-3 clients out of 750 affected. 

Considerations for longstanding companies  

Longstanding businesses may have the opportunity to claim back their overlap profit, and adds another layer of complexity to the reform. Planning ahead is essential, much like it is for year-end tax saving. 

Key transition dates 

The old rule dictates that the reform, effective from December 2023, will be in force from April 2024. Under the reform, businesses will be taxed until March 31st. This means businesses need to change their thinking and plan for possible higher tax payments, as well as adjust their advance payments. 

For example, if your tax return for 5th April 2025 would typically cover the period up to December 2024, with the basis period reform, it extends by an additional three months, concluding on March 31st. To get around this you’ll need to estimate your return and then submit a correct return and then pay penalties and interest for getting it wrong. 


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