The Basis Period Reform is being brought about in readiness for HMRC to introduce ITSA in 2026
These reforms affect all unincorporated businesses/sole traders/Partnerships and LLPs and seeks to bring the actual trading year ends in line with the tax year end date of the 05 April each year.
Basis periods only relate to those businesses that do not have a trading year end as of 05 April each year. This also includes Partnerships, specifically when partners or members are admitted into the partnership or LLP.
If your trading year does not end on the 05 April then these reforms will affect you.
As it stands there are different rules for businesses that start to trade prior to the tax year end depending on their chosen first year trading end date.
For example, if you commence trading on the 01 December 2021 – you would think that your year end would be the 30th November 2022 (if basing this on one year of trading), however for tax purposes this would mean that you would have to pay tax on the profits for the following period:
First Period: 01 December 2021 to 05 April 2022
Second Period: 01 December 2021 to 30 November 2022
There is in effect ‘an overlap period of 4 months’.
This overlap profit gets carried forward each tax year until you cease to trade.
The new reform dictates that as from 2024/25 all businesses will start to be taxed on the profits generated between the start and end of the tax year – the tax year being 06 April to 05 April. Although if your year end is the 31st March – do not panic – as HMRC will allow for this.
As 2023/24 will be the key tax year when it comes to these rules, this will be deemed to be the year of transition. If your accounts are not finalised before the tax filing deadline then estimates will need to be made and amendments made later on.
If your year end is October 2023 – you will need to estimate profits up to the 05 April 2024 and pay the additional tax due on your 05 April 2024 tax return.
| Year-end 31 October 2023 (Actual Profits) (12 months) | £110,000 |
| Period 1 November 2023 to 05 April 2024 (Estimate additional 4 months) | £30,000 |
| Total Profits for the period | £140,000 |
| Less: overlap profits brought forward | (£10,000) |
| Total Taxable profits for the extended period to 05 April 2024 (the transitional year) | £130,000 |
HMRC are offering to allow the payment of the tax liability generated from the transitional period profits to be spread over five tax years so that you do not need to find the taxation completely by January 2025.
The other question is what if you do not know if you have any overlap profits to be considered? What if you have changed your Accountants and this information has been ‘lost’. How are you going to benefit from the overlap profit relief?
