HMRC has announced basis period reforms.
These are mandatory for unincorporated businesses, such as sole traders—even if they are not affected by Making Tax Digital.
Let’s take a look at the details and how you can roll this out among your clients.
Here’s what we cover:
- What is basis period reform?
- What are the dates of the basis period reform?
- What basis period reform looks like for a business owner
- What if a sole trader can’t adjust for basis period reform?
- Basis period reform: What accountants should do now
What is basis period reform?
The reform is straightforward in principle.
As of the 2024/25 tax year, all affected businesses must use the tax year as their basis period. They will only be liable for profits arising in, or apportioned to, that and subsequent tax years. Overlap profits will no longer exist after a transition period.
Most sole traders already use the tax year as both their accounting and basis period, of course, so these changes will not affect them. But those that have different accounting periods—such as 1 January to 31 December—will have 2023/24 as a transition period.
In other words, and only for those businesses with accounting periods that don’t match the tax year, this particular basis period will be longer than 12 months.
Because this is likely to create larger tax bills, HMRC will be offering transitional relief.
You can spread the profits of this final period (e.g. 3 months for a business with an accounting date of 30 September) proportionally across the following 5 years (or paid more quickly, if desired).
Although influenced by the introduction of Making Tax Digital for Income Tax, basis period reform is a separate provision.
It will affect all unincorporated businesses—even those unaffected by MTD for Income Tax.
What are the dates of the basis period reform?
This is how it looks running up to 2024/25, which is the first year for which the reforms are mandatory:
- 2022/23: Last year of the existing basis period rules.
- 2023/24: Transitional year. This is when businesses will have to move to the new fiscal year basis and, if not using the tax year as the basis period, will generate transitional taxable profits after their accounting period ends in the tax year. For most businesses, this will could mean drawing up 2 sets of accounts: One up to the end of the existing accounting period–end and transitional accounts drawn up to 5 April 2024. Alternatively, accounts can continue to be drawn up for a full 12+ month period to the existing accounting period end date.
- 2024/25: The first year of the new basis. From this point on, businesses will only be taxed on profits earned in, or apportioned to, the tax year.
HMRC has said an equivalence provision applies which is to say, 31 March 2024, 1 April 2024, 2 April 2024, 3 April 2024 and 4 April 2024 are all treated as if they’re 5 April. There is an option for a taxpayer to opt out of these rules if required.
In other words, any extra days after 31 March are treated as if they’re in the following tax year.
What basis period reform looks like for a business owner
John Smith runs a plumbing business as a sole trader.
It was established in September 2015, and John decided he would run his accounting period from that date, meaning he generated 6 months of overlap profits at that point.
When it comes to basis period reform, John has 2 options:
- Carry on using his existing accounting period
- Use the opportunity to switch his accounting period to the tax year so his basis and accounting period match.
For 2023/24, John includes profits from his accounting period ending 30 September 2024 in the return for the tax year.
He will apportion his profits for the accounting year ending 30 September 2024 which will mean he has an additional 6 months of “transitional period” profits in the basis period for that year.
However, John also has overlap profits from when he established his business, which must be deducted from transitional period profits.
What’s left is referred to as the transitional amount.
John then has the option of proportionally spreading the transitional amount over the following 5 years. Alternatively, he can include the whole amount in 2023/24.
HMRC is adjusting its online web forms to include an application to see the information it holds about overlap profits This has recently been launched, alternatively you can fill out a form and apply by post.
What if a sole trader can’t adjust for basis period reform?
There’s little current official advice for those with reasons not to adjust accounting periods for the basis period reforms.
Indeed, for many clients, such as farmers or seasonal businesses such as tourism, it might be unviable to do so.
For all those that will find themselves adopting Making Tax Digital as of April 2026 or April 2027, having asynchronous accounting and basis periods could present issues.
At the moment, we understand that any business making the switch will declare the transitional profits as part of either its Self Assessment tax return each year, or its Making Tax Digital for Income Tax final declaration. However, the government may introduce further steps to this process which will be revealed before MTD for Self Assessment arrives in April 2026.
The issue relates to the requirements for the end of period statement (EOPS) and tax payments.
There’s a requirement to submit the EOPS by 31 January following the end of the tax year. The requirement to pay the Income Tax bill and National Insurance contributions doesn’t change, so this will also be due on this date.
However, if the accounting period has not been completed at that point, the accounts won’t have been drawn up.
Therefore, it will be impossible to provide accurate information on the EOPS, and only an estimate can be provided.
Any subsequent tax payment will also therefore also be an estimate. All of this will create a requirement to indicate the amounts are provisional and to file amendments when the actual profits are determined.
It is therefore essential to use the transition year to switch to the tax year for the basis period—although don’t forget that businesses will need to know their original overlap profits.
If a business is planning to change its accounting period end, it may be worth looking to make this change by 5 April 2024 to minimise the impact, but also bearing in mind any commercial implications of a change.
Basis period reform: What accountants should do now
While some clients might be waking up to the reality of Making Tax Digital for Income Tax, very few are likely to have heard of basis period reforms.
Don’t forget, too, that many who are outside the scope of MTD for Income Tax will still be affected by the basis period changes even if their accounting periods don’t match the tax year.
The work involved in adjusting to these new regulations could be just as involved as that of embracing MTD for Income Tax.
As is often the case with changes to tax law, HMRC is relying upon accountants to not just get the message out, but also to explain the details. If you aren’t already familiar with the changes, you can review the current guidance and check back regularly in case of any further updates.
Accountants are not just in a position to help their clients but might be the only sources who are able to explain the on-the-ground reality of what the reforms mean for a client’s unique situation.
Yet the task moving forward isn’t just to educate your clients about issues such as the requirement to switch to a new basis period, and reliefs introduced by HMRC.
It’s also to walk them through making key choices about whether to adjust their accounting period.
For clients in business for some time, records of overlap profits might not be available, in which case it might be necessary to contact HMRC well ahead of time and request these.
Considering the large number of businesses that will be requesting such information, you should ensure that preparations get underway as soon as possible. Using tools such as client management software can make this process significantly easier and more efficient.
Editor’s note: This article was first published in January 2022 and has been updated for relevance.
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