COMPLIANCE
The challenges of the basis period reform
Since 6 April 2024, a new ‘tax year basis’ of assessment applies to trading profits subject to income tax. Richard Hattersley, managing editor of AccountingWEB, explores the changes and what they could mean for certain organisations
T he basis period reform is a fundamental change in the way unincorporated businesses calculate their trading profits for tax purposes. As a result, all unincorporated businesses will now use the UK tax year of 6 April to 5 April as their basis period for income tax assessment. This is the first year in which profits need to be reported to the tax year end, as basis period reform kicks off with the 2023/24 ‘transition year’. Simple, right? Not quite. As one AccountingWEB reader noted in an article on the site about the changes ahead for unincorporated businesses: “Now, I’m not uneducated, but given my day job is not in compliance, I’m not sure where I would begin to understand the rules.” The change will also present extra administration for businesses that don’t draw accounts up to 31 March or 5 April. What, who, why and when? So let’s look at what’s changing, when it’s changing and who it’s going to impact. Incorporated businesses have reported their profits and losses under the ‘current year basis’ since 1996/97, when they could calculate their taxable profits based
on their accounting period wherever that fell in the tax year. So, the switch from the current year basis of assessment to this new tax year basis is quite the transition for some businesses. “These reforms have come into force to make the basic assessment of trading profits more straightforward and align with other sources of income” These reforms have come into force to make the basic assessment of trading profits more straightforward and align with other sources of income. One benefactor of this change is making tax digital for income tax self-assessment (MTD ITSA), since the tax year will now be aligned to all unincorporated businesses’ accounting periods. Those that draw their accounts up to and between 31 March to 5 April breathed a sigh of relief as these changes don’t affect them, as those periods are treated as the 5 April. The businesses affected by this change are
those subject to income tax, such as sole traders and individual partners. Seasonal businesses like farmers or even creative artists are good examples of those affected. Farmers typically have an accounting period which falls just after the majority of their income for the year has been realised. The reforms mean they will instead have to switch to drawing up their accounts to a date in the middle of their busy season. Repercussions of the reform The tax year 2023/24 marked a transition to the new tax year basis of assessment, with specific rules applying during this period that could lead to additional ‘transition profits’. In a recent article on AccountingWEB, Emma Rawson outlined some of the tax implications in the transition year. Transitionary head scratchers Transition profits resulting from the basis period reform aren’t included in net income when carrying out the income tax calculation for the year; instead, they‘re subject to a separate tax charge. This exclusion prevents potential impacts on other tax aspects like the high income child benefit charge threshold and the pension
| Professional in Payroll, Pensions and Reward | July - August 2024 | Issue 102 32
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