Government abolishes basis period rules for profit reporting, affecting thousands of sole traders and partnerships.

Abolition of Basis Period

What is Basis Period?

A basis period is the time period for which a sole trader, partnership or LLP pays tax each year. This is usually the sole trade/ partnerships accounting year.

For example, if you started your sole trade/ partnership business on 1 June 2015, then your accounting period is likely to have been the 12 months from 1 June 2015 to 31 May 2016. Therefore, you are taxed on the profits or losses for the accounting period ending in the tax year. From 6 April 2024, profits or losses for a tax year will be the profits arising in the tax year regardless of the accounting period end date. The transition year is 2023/2024 to ensure we align all current accounting periods to be in line with the tax year.

Please note that HMRC have now abolished the basis period method of reporting trading income and as you are a sole trader and/or a Partnership/LLP and your business accounting year end doesn’t fall between 31 March to 5 April (inclusive), you will be affected by the basis period reform. From 2024/25 all unincorporated businesses must report and will be taxed on their profits arising in each tax year instead of those shown by their accounting period ending in the tax year. The last year for using the old basis period method is 2022/23 and so 2023/24 is a transition year.

When reporting profits in your 2023/24 tax return, the business will need to include the total of those for the accounting period(s) ending in that year plus any profits arising in the remaining part of that tax year. For example, a business who prepares accounts to 30 June must report the profits for the accounting period 1 July 2022 to 30 June 2023 plus 9 months profits to 5 April 2024 (or 31 March 2024). Therefore, in this example, you will be paying tax on profits made over 21 months in the 2023/24 tax year.

Your business may have accrued overlap profits (i.e. profits that have been taxed twice) when you started out in business or if you changed the accounting period anytime since the commencement of your business. Any overlap profits would be relieved in the transitional 2023/24 tax year, thereby reducing your taxable profits. These additional profits become known as “transitional profits” (i.e. additional profits from your normal year end to 5 April 2024 (31 March 2024) less overlap profits). If you are not aware of any overlap profits and do not have these on our records, your accountant will request the overlap relief details from HMRC via an online form which is available from 11 September 2023.

In recognition that these reforms will bring forward the payment of tax liabilities and the potential to tax ‘transitional profits’ at higher tax rates, the government has introduced spreading provisions. The provisions permit transitional profits to be spread equally over five tax years, including 2023/24, but the trader can elect to be taxed on them sooner, if suitable. Any untaxed transition profits are taxed automatically on cessation of the trade. Therefore, at Charterhouse will we continue to monitor your transitional profits year on year and advise whether any beneficial elections exists to mitigate your tax liabilities.

From the 2024/25 tax year and onwards, as taxable profits will be based upon the tax year, it may be preferably to consider changing your business’s accounting period end to 31 March 2024. This will assist potentially keeping costs down and give you sufficient time to prepare your business accounts and tax returns following your year end. Please let us know if this is acceptable and we can assist with making these changes.

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