What You Need To Know About Basis Period Reform

The Basis Period Reform comes into effect in the new tax year (from 6 April 2024), with the 2023/2024 tax year being a ‘transitional year’. This means that you may have additional profits to report – and therefore more tax to pay – when the current tax year ends.

But there’s no need to panic! Not everyone will be affected by the reform and there are steps you can take to minimise the disruption to your business. So in this blog we’re discussing what the Basis Period Reform is, who it affects and how you can best prepare for it. 

What is the Basis Period Reform?

Announced in 2021, the Basis Period Reform is set to simplify the taxation of trading income and make it more fair and transparent. It means that, going forward, all profits will be calculated in tax years, regardless of the dates of your accounting year. It will come into effect from 6 April 2024 – the start of the new tax year – with the current 2023/2024 tax year being a ‘transitional year’. 

What does a transitional year mean? It means that, for this tax year only, your profits will be calculated from the beginning of your accounting period right up to the end of the tax year on the 5 April. So if, for example, your accounting period begins on 1 January, you’ll be taxed on any profits received between 1 January 2023 and 31 December 2023 (known as the ‘standard period’) AND on profits received between 1 January 2024 and 5 April 2024 (known as the ‘transitional period’). And yes you’ve guessed it – that unfortunately means you’re likely to have a higher tax bill at the end of this tax year.   

Who will this affect?

The Basis Period Reform applies to self-employed traders and those with trading income, such as sole traders, partnerships and other unincorporated businesses and will affect those whose accounting dates are different to tax year dates. However, there is a bit of leeway here – if your accounting period ends between 31 March and 5 April then you can continue to report your profits as before. 

How can you prepare for these new rules?

The best way you can be fully prepared for the Basis Period Reform and ensure that your business is running in the most tax-efficient way is to seek an accountant’s advice. Why? Because there are certain ways you may be able to reduce your tax exposure, but this will be personal to your specific business and the way that it operates. 

For example, your accountant may guide you through using up any overlap relief or advise you about alternative ways to spread out your transitional period profits across several tax years (something the government is currently allowing) in order to reduce your tax bill further. Again, there are many individual factors that can affect this, so seeking financial advice is the best way to ensure you’re benefitting from all the relief that’s available to you. 

Providing a personal, fully tailored service is something we like to do as standard here at Warr & Co. We provide a range of accountancy services for a variety of businesses and individuals; we reject a ‘one-size-fits-all’ approach and instead focus on really taking the time to understand your business, your circumstances and your long-term goals so that we can provide the most effective, innovative and forward-thinking services. Head over to our website to find out more or sign up for a free consultation and let us help you navigate these complex Basis Period Reform changes to reduce your tax liabilities as much as possible.