Income Tax: Basis Period Reform

Updated: Jan 27

2 November 2021


Are you an unincorporated business, trading as a sole trader or partnerships?


Then you need to know how the proposed reform of the Income Tax Basis Period  would impact you, transitioning in 2022/23 and effective from 2023/24.


At LEXeFISCAL LLP we can help you analyse the impact the reform will have on your business and consider any remedial action that may be appropriate. 


As the government moves rapidly towards introducing Making Tax Digital (“MTD”) for Income Tax which will require quarterly reporting from April 2024, HMRC have published a policy paper setting out fundamental changes to the rules for taxing trading income.


General description of the reform


The policy paper published on 27th October 2021 changes the basis period rules from a “current year basis” to a “tax year basis” with effect from 2024 to 2025.


The basis period reform changes the way trading income is allocated to tax years. Generally, businesses draw up annual accounts to the same date each year, called their “accounting date”. Currently, a business’s profit or loss for a tax year is usually the profit or loss for the year up to the accounting date in the tax year, called the “basis period”. Specific rules determine the basis period in certain cases, including during the early years of trading. These rules can create overlapping basis periods, which charge tax on profits twice and generate corresponding “overlap relief” which is usually given on cessation of the business. Overall, this basis of taxation is called the “current year basis”.


The measure changes this to a “tax year basis” with effect from the tax year 2024 to 2025, so that a business’s profit or loss for a tax year is the profit or loss arising in the tax year itself, regardless of its accounting date. This removes the basis period rules and prevents the creation of further overlap relief.


On transition to the tax year basis in the tax year 2023 to 24, all businesses’ basis periods will be aligned to the tax year and all outstanding overlap relief given.


The basis period reform will impact


The proposed changes will impact individuals, trusts and partnerships with trading income (including income from a profession or vocation) as well as unincorporated entities with trading income, such as trading trusts and estates and non-resident companies with trading income charged to Income Tax.


This measure will only affect businesses which draw up annual accounts to a date different to 31 March or 5 April (mainly seasonal businesses and large partnerships), and businesses that commence from 6 April 2024.


Timing


The reform will come into effect from 2024 to 2025 tax year.


A one-year transition period is proposed with two components determining the basis of taxable profits for the 2023/24 tax year.


Key cocerns


The professional bodies consider that digital tax reforms are being implemented too quickly, with the changes to basis periods likely to place pressure on businesses and their advisers as well as on HMRC.

While this simplifies some aspects of the current regime such as the opening and closing year rules, and overlap relief rules, it would introduce some new practical and commercial issues, and many detailed matters remain to be addressed for clarification such as:

  • basis period reform will come on top of the changes required by MTD for income tax and more small businesses being brought within the scope of MTD for VAT;

  • the scale and complexity of change will affect many small and unrepresented businesses, many of which will not understand the technical changes and will need extra help and public education program before implementation;

  • basis period reform will add complexity for some businesses and will result in earlier payment of tax by many – potentially damaging for businesses recovering from the impact of Covid-19.

With fundamental changes to the basis period for charging tax and acceleration of the timing of the payment of tax on profits, taxpayers should consider taking expert specialist advice to help ensure they:

  • Understand the real impact of these changes on their business;

  • Have accurate timely information on which to make competent decisions for their businesses.

If you have any questions regarding the existing basis rules and examine how things will change under the new measure, at LEXeFISCAL our team of experts are glad to guide you.



Lef Income tax basis period reform
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For further information on any of the points above, please contact:

Kseniya Devlekanova at: kseniya@lexefiscal.com , or

Dr Frank J Clifford at: clifford.frank@lexefiscal.com. 



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