Reporting Profits on a Tax Year Basis

Starting with the Self-Assessment return due by 31 January 2025, all sole trader and partnership businesses must report their profits on a tax year basis.

What is the Basis Period Reform?

The Basis Period Reform represents a major change in how self-employed individuals and partnerships calculate their taxable profits. Previously, the basis period was tied to the business’s accounting period, often resulting in complexities and mismatches in tax liability.

This reform aims to simplify the tax system and ensure greater fairness and consistency. As a result, trading income will now be taxed in the year it is earned. These changes will take effect in the 2024/25 tax year, with the transitional year being 2023/24.

What are the changes involved?

For businesses previously using a different accounting year end to the tax year must declare profits from the end of the previous accounting date in 2022-2023 up to 5th April 2024. The additional profit (after overlap relief) will be classified as transitional profit. This will be spread over five years by default, starting with 2023-2024. For the accounting periods that are currently ending 31st March, they will now be treated as equivalent to those ending 5th April.

To get more information about Basis Period Reform, click here to watch a video published by HMRC.

Why is it important?

One of the main objectives of the Basis Period Reform is to simplify tax calculations for self-employed individuals and partnerships. Previously, different rules for determining the basis period led to confusion and unnecessary complexity. This reform streamlines the calculation of taxable profits, making it easier for taxpayers to understand and meet their tax obligations.

Under the old system, the misalignment between accounting periods and tax periods often caused mismatches in tax liability. This could result in individuals and businesses paying tax on income they hadn’t yet received or, conversely, delaying tax on income already received. The Basis Period Reform aims to align tax liability with actual income earned, reducing these mismatches and creating a fairer system.

With the new rules, taxpayers can enjoy greater control and predictability in their tax planning, individuals and businesses can better manage their tax liability according to their financial circumstances. This increased flexibility is especially advantageous for those with fluctuating incomes.

The Basis Period Reform is aligned with the UK’s ongoing digitalisation of the tax system, known as Making Tax Digital (MTD). Simplifying and standardising the basis period calculation is crucial as more tax processes move online. Therefore, this streamlines reporting and compliance, facilitating the transition to MTD and improving taxpayer interactions with HM Revenue & Customs (HMRC).

Click here for further support on Basis Period Reform.

Further Information

If you would like more information on reporting profits on a tax year basis, please contact your usual NRB advisor.

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