Basis period reform: what is it and who does it affect?

Illustrated Rubik's cube with 'Apr 5' written across different blocks that are being lined up.

Basis period reform is a phrase that might have you well and truly puzzled. Your first move is to figure out whether this affects you. 

We’re here to help you complete the puzzle in record time, with an easy-breezy guide to what basis period reform is and who’ll be affected. 

What is basis period reform?

For sole traders and partners, your business’s basis period is the time period for which you pay tax on your share of your business’s income (minus its day-to-day running costs and certain allowances). Prior to 6th April 2024, a business’s basis period usually covered the same dates as its accounting year. Now, however, the rules have changed.

What are the new basis period rules?

From 6th April 2024, all unincorporated businesses (sole traders and partnerships) will be taxed on profits made during the tax year (6th-5th April), regardless of when their accounting year ends. This simplifies the rules and removes the need for overlap relief going forward. 

Who does basis period reform affect?

You’ll only need to take action if all of the following are true:

  • you’re a sole trader or a partnership for which none of the partners is a limited company
  • the business has trading income 
  • the business’s accounting year doesn’t line up with the tax year 

If your business’s accounting year already ends on 5th April, you don’t have to worry about this. Also, if your year end falls between 31st March and 5th April, HMRC will allow you to treat this as falling at the end of the tax year and you won’t need to change anything. 

How should your business report on your 2023/24 accounting year?

HMRC is treating 2023/24 as a transitional year. That means you’ll be taxed on the profit for your accounting year as if the rules weren’t changing (which is called the ‘standard profit’). Then you’ll need to work out the profit covering the period from the end of your old accounting year to 5th April (the ‘transitional profit’). 

If you’re planning to keep the same accounting year end going forward, you’ll need to work out your transitional profit. You can do this by proportionally dividing your next accounting year’s profits.

For the 2023/24 tax year, you’ll pay tax on the standard profit and tax on at least one fifth of the transitional profit. Luckily, HMRC allows the transitional profit to be spread over up to five years for tax. 

We recommend getting advice from an accountant if you have more questions about standard and transitional profit. 

How else can FreeAgent help my business?

For 2023/24 and going forward, FreeAgent will calculate your transitional profits and apportion them to the correct basis period for tax. As well as helping you to navigate the new basis period rules, FreeAgent has loads more features to simplify your business accounting. You can use FreeAgent to automate your daily admin, calculate your tax responsibilities and remind you of deadlines. 

Try a 30-day free trial of the friendliest accounting software (ICB Luca Awards 2023 and 2022) and take some pressure off your next tax return.

Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.

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