Basis period reform: Answers to 6 questions that accountants have about the changes

Basis period reform marks a significant shift for you and how some of your clients pay their taxes.

In this article, we answer questions that you as an accountant and the team at your practice may have around the reform, who will be affected and what it means for Making Tax Digital for Income Tax Self Assessment.

Here’s what we cover:

What is basis period reform?

Basis period reform is a change in the UK tax system affecting how business income is allocated to tax years for income tax purposes.

Traditionally, unincorporated businesses in the UK have been taxed (for income tax purposes) on profits earned in their “accounting period” that ends within the relevant tax year.

However, with basis period reform, this is set to change – with a goal of simplifying this.

On 6 April 2024, the basis period for taxation aligned with the tax year itself, rather than the accounting period. This means unincorporated businesses may need to adapt to a new way of calculating their taxable income.

Here’s an example.

Say one of your clients is a sole trader with a 31 December year-end, for the tax year running from 6 April 2024 to 5 April 2025.

With that in mind, their taxable profits will include:

• Nine months from the accounting period ending in December 2024
• Three months from the period ending in December 2025.

This shift is a significant departure from the current system and requires careful consideration and planning.

Additionally, in order to move from the current basis periods to having basis periods aligned to the tax year, we have to go through what’s referred to as a ‘transitional year’ in the tax year running from 6 April 2023 to 5 April 2024.

This transitional year ensures everything that falls in-between has been taxed.

6 answers to questions on basis period reform

You may have lots of questions with regards to the basis period reform. In the section below, we answer some of these.

1. When is the basis period reform happening?

Basis period reform is effective from 6 April 2024 (2024/25 tax year).

However, the transition period began in the 2023/24 tax year.

2. Who will be affected by the basis period reform?

The basis period reform affects the following that have an accounting period that isn’t aligned to the tax year i.e. an accounting period end date that isn’t 5 April:

• Self-employed individuals
• Partners in partnerships
• Other unincorporated businesses.

Those with an accounting period end date on or between 31 March to 4 April will be treated as having an aligned accounting period under the default late accounting date rules.

However, taxpayers can choose to opt out of this if they wish.

3. How does basis period reform relate to Making Tax Digital?

Basis period reform is closely related to Making Tax Digital for Income Tax Self Assessment (MTD for ITSA).

When it comes into force from April 2026, MTD for ITSA will require impacted businesses to:

• Keep digital records of income and expenses
• Submit summary data on those digital records quarterly using compatible software
• Carry out a Final Declaration, which is akin to the current Self Assessment tax return done now.

By aligning basis periods with the tax year, basis period reform simplifies this process, making it easier for businesses to comply with MTD requirements.

It also makes the estimated tax liability calculations far more accurate and therefore useful to the taxpayer.

4. How will transitional profits impact payments on account?

Transitional profits might increase the income assessed in the transitional year, potentially raising the payments on account for the following year.

However, the spreading relief over five years can help to mitigate this impact.

It’s also worth noting that the existing rules around making a claim to reduce payments on account remain the same under basis period reform.

This may be worth exploring for those clients whose payments on account have been disproportionately impacted.

5. Should we align our clients’ VAT quarters to the tax year?

Aligning VAT quarters with the tax year isn’t a requirement.

However, it could be beneficial for administrative convenience for some clients, especially those with a 31 March accounting period end.

This alignment can simplify accounting processes and make it easier to reconcile VAT and income tax records.

However, the decision should be based on the specific circumstances and needs of each client.

6. How will transitional profits impact adjusted net income for the purpose of things such as the High-Income Child Benefit Charge?

According to Business Income Manual 81320: “The transition profits are excluded from the net income amount to reduce the impact on benefits and allowances.”

This would suggest that most benefits linked to income levels such as Child Benefit and therefore the High-Income Child Benefit Charge (HICBC) will be unaffected by transitional profits.

But it’s worth double-checking with HMRC on individual entitlements and obligations.

Final thoughts on basis period reform

The basis period reform represents a shift in the way businesses in the UK will approach their tax affairs.

It’s true that the reform change offers its own set of challenges, particularly in the transitional year.

However, it’s worth noting that the reform potentially offers a more streamlined and transparent approach to taxation in the long run.

As your practice and your clients adapt to these changes, staying informed and proactive is crucial.

Editor’s note: This article was first published in March 2024 and has been updated for relevance.