The UK tax system is undergoing a significant transformation with Basis Period Reform (BPR), a change set to streamline the process of assessing income tax on trading profits. This reform is particularly relevant for individual partners and sole traders, marking a shift from the present-year basis to a tax year basis.
In Basis Period Reform – The Agent’s Need to Know, Emma Rawson discusses what you need to know about BPR, what's changing, and when these changes will take effect.
What is Basis Period Reform?
At its core, the Basis Period Reform transitions the method of taxing trading profits from the current year basis to a new tax year basis. Under the current system, taxpayers are taxed on the profits of the accounting period ending in a tax year. However, with the BPR, taxation will be based on the profits arising within the tax year itself, specifically from April 6th to the following April 5th. This change aims to simplify tax administration and is applicable solely to trading profits subject to income tax, affecting individual partners and sole traders. It's important to note that companies are not impacted by this reform.
Key Changes and Timeline
The transition to the new tax year basis will be fully effective from the 2024-25 tax year. However, a transitional phase in 2023-24 introduces specific rules for profit taxation and computations to ease into the new system. This phase is crucial for understanding how profits will be taxed under the new regime and preparing for the full implementation.
One of the notable aspects of the BPR is its alignment with Making Tax Digital (MTD), which mandates quarterly reports based on the tax year. This synergy is expected to facilitate a smoother transition to MTD's full implementation in 2026. For businesses with non-standard fiscal year ends, this reform may introduce additional administrative tasks and potentially higher taxes, although it simplifies the process for many others.
Transitional Year and Apportionment
During the transitional year of 2023-24, specific rules will apply to bridge the gap between the old and new systems. Profits will be apportioned from sets of accounts to align with the tax year, with March 31st deemed equivalent to April 5th for these purposes. This means that businesses drawing accounts up to March 31st will find this transition relatively straightforward. However, those with different accounting dates may face extra work each year to apportion profits between tax years.
Impact and Considerations
While the BPR aims to simplify tax reporting for many, it introduces complexities for a subset of businesses, particularly unincorporated entities with unconventional year ends. The reform does not prevent businesses from choosing their accounting dates, but it breaks the direct link between the accounting period end and when profits are taxed. This could mean additional work and tax implications for those affected.
Moreover, the reform addresses the issue of tax deferral advantages under the current system, where the chosen accounting period end could significantly delay tax payments on profits. By standardising the tax year, BPR eliminates these deferrals, creating a more uniform tax payment timeline for all businesses.
The Basis Period Reform represents a significant shift in how trading profits are taxed, aiming to simplify tax administration and align with digital reporting initiatives. While it promises benefits for many, it also poses challenges for some businesses, necessitating careful planning and adaptation. As we approach the transitional year and beyond, staying informed and prepared will be key to navigating these changes successfully.
For the full session, please click here. Emma Rawson covers the following topics during this course:
- What’s changing and when
- The tax year basis from 2024/25
- Calculating profits and tax in the transitional year 2023/24
- The importance of overlap relief and spreading
- Practical and financial pain points.
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.
