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Basis Period Reform – a reminder of the tax impacts

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It feels like a long time ago that these changes were first announced. They are now upon us, and the tax effects will be felt from the 31 January 2025 tax payment onwards, potentially for the next five years.

So, what is Basis Period Reform?

From the year ended 5 April 2025, all sole traders and partnerships will be taxed based on the profits for the tax year (i.e. 6 April – 5 April).  It is worth noting that a year end of 31 March can be treated as 5 April for this purpose. This change will affect the forthcoming tax payments for all self-employed taxpayers who previously had anything other than a 31 March or 5 April accounting year end.

It is expected that most of those affected will choose to move to a 31 March or 5 April year end, but where accounts continue to be prepared with any other accounting year-end, there will need to be an apportionment to arrive at the taxable profit figure each year.

2023/24 – The Transitional Year

The 2023/24 tax year will be the year that sees all taxpayers move onto this new basis and any profit-making taxpayer who previously had anything other than a 31 March or 5 April year end will be taxed on more than 12 months’ worth of profit in that tax year.  For example, if there had previously been a 30 September accounting year end, the profits taxed in the 2023/24 tax year will be the profits for the year ending 30 September 2023 plus profits for the period 1 October 2023 to 5 April 2024 (or 31 March 2024).

There will then be a deduction for “overlap profits”.  The overlap profits will generally have been created when the business started or, for partners, when they joined the partnership. For businesses started before 1996/97, the overlap would have been created then, the last time that the basis period was changed. The overlap relates to a period of profit that was taxed twice in either of those scenarios, which is likely to have been at a time when profits were being earned at a lower level than they are now.

Where the overlap profit is less than the additional profit being included for 2023/24 (in the above example, the period 1 October 2023 to 5 April 2024 or 31 March 2024) the excess will be spread over five years.

The first 1/5th will be added to the taxable profit for 2023/24 and the tax on those profits will be payable by 31 January 2025.

The effect on future taxable profit

The remaining 4/5ths will be taxed equally in each year 2024/25 to 2027/28, so this will impact tax payments right through to 31 January 2029.

There is the ability to elect to accelerate the adjustment to profits, which you may wish to do, for example, if you think your income will be significantly higher over the next five years than it is currently, or maybe if you are concerned that potential changes in government may lead to changes in future tax rates.

It should be noted that if you cease in business within the next five years, e.g. by retiring, or for partners, by moving partnership, all of the remaining balance will become taxable in the tax year of cessation. This may potentially push profits into a higher tax rate.

If you would like to discuss further how you will be affected by Basis Period Reform, and the options available to you, please get in touch with your usual contact at BHP.