HMRC is changing the time period that sole traders and partnerships use to work out their taxable profits in a reform called the basis period tax change.

This change will impact sole traders and partnerships with an accounting period end date that falls outside 31 March and 5 April, and new businesses that open from 6 April 2024.

In this guide, we’ll tell you everything you need to know about the reform.

Understanding the basis period reform

To explain the reform, we need to understand the terms ‘basis period’ and ‘accounting period’:

  • Basis period: This is the period of time used to calculate profits and income tax for a business.
  • Accounting period: This is chosen by businesses and is the time period they use for financial reports, such as financial statements.

Under the current rules, income tax is calculated on the profits earned during a business’s accounting period, which can be different from business to business. That means the basis period can change from business to business.

For example, one business might have an accounting period that ends on 31 October, meaning their taxable profits are calculated from 1 November 2021 to the year-end date of 31 October 2022 for the 2022/23 tax year. Another might have an accounting period ending on 30 June. Taxable profits are calculated from 1 July to 30 June 2022 for the 2022/23 tax year, in this case.

You might already realise a problem with this system – lots of businesses have vastly different accounting periods, complicating tax collection. Therefore, from the 2024/25 tax year, HMRC’s reform will require all unincorporated businesses to use the UK tax year from 6 April to 5 April.

In other words, the reform means that you will use the tax year, rather than your accounting year, as the basis period.

Which businesses are impacted by the basis period reforms?

The change will affect unincorporated businesses, which are:

  • Self-employed traders, including individuals with a profession or job.
  • Partners in trading partnerships, including limited liability partnerships.
  • Other unincorporated entities with trading income, such as trading trusts and non-resident companies with trading income charged to income tax.

How could the reform affect you?

If you have an accounting period that aligns with the tax year, you’ll be able to carry on as normal. Only those with a unique accounting period need to worry.

The 2023/24 tax year is a transition year, affected businesses may have more than 12 months of profit taken into account – resulting in a higher tax bill than usual.

To mitigate this, it’s important to include overlap relief in your 2023/24 tax return if the changes mean you have overlapping basis periods.

The government website has guidance on how to use overlap relief to reduce your profits. We highly recommend you have a look.

Alternatively, you can reach out to us and discuss the basis period tax change with a team of professionals who will answer all your questions. You just have to reach out to us.

Talk to us about the basis period tax change.