Basis period reform

Since the introduction of self-assessment in 1996, income tax has been based on the accounting period of a business. Each business can choose the date to which they draw up their accounts, and while many choose 31 March or 5 April, this is not the case for everyone.

Some businesses choose to have a year end date that fits with their specific activity; for example a September year end for a tourism/leisure business, or a December year end for a business whose focus is the festive season.

So what’s happening. Well, basis periods for income tax purposes are being replaced by the “tax year basis”, with transitional rules applying from 6 April 2023. Initially it was thought that these rules were being introduced to tie in with MTD for Income Tax and would be delayed given the MTD delays, but this is not the case.

Basis periods only apply to non-corporate business, so partnerships and sole traders. If you run a business in this way, you maybe affected.

If you already prepare your accounts to 31 March each year, you won’t be affected by these new rules as you are already being taxed on the tax year basis.

If you operate with a different year end, you will be affected.You will have to choose to either:

• Change your business year end or
• Keep your existing business year end and time apportion profits from two accounting periods, to arrive at a tax year basis profit.

The following is an example of how the new system will work for a business that has a 30 April year end.

• A business has a 12-month accounting period ending 30 April 2023.
• In the 2023/24 transitional year it will recognise: The profits arising in the 12-month period ended 30 April 2023 (the standard part). The profits arising in the period from 1 May 2023 to 5 April 2024 (the transitional part). This will be taken from the accounts for the year to 30 April 2024.

As you can see from the above, this will mean nearly two years of profits fall into the 2023/24 tax year. Reliefs are available in the form of overlap profits and spreading. However, the impact of this change on your tax position could be significant and we will be speaking to all affected clients over the coming months. The decision about whether to change your accounting date will also need to be given careful consideration.

If you think you will be affected by this change and would like more information on how this will impact you, please contact your usual Albert Goodman point of contact in the first instance.