What is basis period reform and why you should care

The Basis Period Reform is a significant change to how unincorporated businesses, such as sole traders and partnerships, calculate their taxable profits in the UK. If tax accounting makes you want to dive back under the duvet and not come out until 1^st February, you might not want to read on but stick with us because this change could significantly impact your tax bill in January 2025.

Impact for a limited company business owner

Limited companies are not subject to the Basis Period Reform because they pay corporation tax, not income tax. Their accounting periods and tax reporting remain unchanged under corporation tax rules.

Impact for a sole trader or individuals in a partnership

Previously, sole traders were taxed on profits based on their accounting period (e.g., if your accounts ended on 31 December, you were taxed on those profits in the following tax year).

From the 2024/25 tax year, all sole traders will be taxed on profits earned during the actual tax year (6 April to 5 April), regardless of their accounting period.

What’s the point of basis period reform?

The reform simplifies reporting by aligning all unincorporated businesses with the UK tax year. This avoids complexities like overlap profits (profits taxed twice in early years) and eliminates the need for overlap relief.

Who is affected?

Sole traders or partnerships with accounting periods ending between 31 March and 5 April are unaffected because their accounts already align with the tax year.

Sole traders and partnerships with other accounting dates (e.g., 31 December) will need to adjust their profit reporting to align with the tax year

Transitional Year (2023/24)

During this year, profits from your old accounting period and any additional months up to 5 April 2024 will be taxed together. This means that when you are completing your tax return for 2024/24, due by 31 January 2025, you may have an additional tax burden due to those extra months.

HMRC allows you to spread any extra tax liability from this transition over up to five years to ease the burden.

Key Benefits

The main benefits of basis period reform are:

• Simplifies tax reporting by aligning with the tax year.
• Prevents double taxation of profits in early trading years.
• Reduces administrative complexity for sole traders.

Summary of actions for sole traders

• Check your accounting date and if it doesn’t end between 31 March and 5 April, you’ll need to adjust. Although it’s not mandatory to change your accounting date, you must still report your profits for the tax year, so not changing could give you extra tax admin work to get to the correct figures.
• Plan for the transition year: Be aware of potential extra taxable profits in 2023/24 (submission and payment due by 31 January 2025) and consider spreading the extra tax over five years.
• Seek advice by consulting an accountant or HMRC if you’re unsure how this affects you.

What happens if I am setting up as a sole trader now?

For a new sole trader starting after April 2024, align your accounts with the UK tax year to avoid complications.

Does tax accounting make your head spin?

Don’t worry – you aren’t alone. We’ll help you sort out your 2023/24 tax return and get you set up to make life simpler for the 2024/25 return period. Call us on 01322250001 or contact us online for a free, no-obligation chat today about this or any other aspect of your business accounting.