ABMV - Basis Period Reform - What Is It and Who Does It Affect?

Introduction

Are you confused by the concept of basis period reform? Many British business owners feel the same way. Understanding this reform is crucial for sole traders and partnerships. We're here to simplify the information and help you through every step of the process.

Let’s dive into what basis period reform is, who it impacts, and how to manage these changes.

What is Basis Period Reform?

First, we need to define a basis period. For sole traders and partnerships, the basis period is the time frame for which you pay tax. It differs from your accounting period, which is the span you use to prepare your accounts, typically a year. The tax year is a fixed 12-month period set by HMRC, running from 6th April to the following 5th April.

Basis period reform was introduced to make tax reporting simpler. Before 6th April 2024, businesses paid tax based on their accounting year. This often led to overlaps and complexities, especially for those whose accounting period did not align with the tax year.

As of 6th April 2024, all self-employed individuals and partners must report their business tax information based on the tax year. This means everyone's basis period now runs from 6th April to the following 5th April. 

Who is Affected by Basis Period Reform?

To determine if you are affected by basis period reform, consider the following criteria:

- Are you a sole trader or partner in a partnership?

- Does your business have trading income?

- Does your accounting period not align with the HMRC tax year?

If you answered yes to these questions, you will need to adjust your reporting practices.

According to HMRC, 93% of sole traders and 67% of partnerships already align their accounting periods with the tax year. If your accounting period ends between 31st March and 5th April, you can treat it as aligning with the tax year. 

However, for those outside this alignment, action is necessary to comply with the new rules. Adapting sooner rather than later will help ensure a smooth transition and avoid any compliance issues.

Transitioning to the New Tax Year Basis

Moving to the new tax year basis involves several key steps. First, understand the concepts of standard profit and transitional profit. The standard profit is the profit calculated using your old accounting period, as if the rules hadn't changed. Transitional profit covers the period from the end of your old accounting year to 5th April 2024.

You’ll be taxed on both the standard profit and part or all of the transitional profit for the 2023/24 tax year. The good news is that HMRC allows transitional profit to be spread over up to five years. This means you can possibly reduce the tax burden by spreading it over multiple years.

Seeking advice from an accountant during this transition can be helpful, especially if your business started recently, has made a loss, or has overlap relief.

Future Planning and Accounting Adjustments

Considering aligning your accounting period with the tax year after 2024 is crucial for simplifying future tax calculations. This can make reporting more straightforward and reduce the administrative burden.

Benefits of aligning your accounting periods include:

- Simplified profit calculations.

- Maximum time (10 months) between your year-end and filing deadline.

- Less likelihood of needing to apportion income between different periods.

However, if you prefer not to change your accounting period, keep in mind the additional steps needed each year. You will have to calculate and report portions of income and expenses from two sets of accounts. 

Conclusion

Understanding the basis period reform and its implications is essential for UK businesses. This reform, aimed at simplifying tax reporting, requires significant adjustments, especially for those with accounting periods that do not align with the tax year. The process involves transitioning to the new tax year basis by understanding and calculating standard and transitional profits, and deciding on spreading transitional profits over five years.

At ABMV, we're here to help you navigate these changes. Our team of experts can provide guidance for your business needs. For personalised advice and accounting services, contact ABMV today. Let us help you make this transition hassle-free.