In the Autumn Statement of 2021, the Government announced a major reform to the way in which a business owner’s trading profits are allocated against the relevant tax year for income tax purposes – otherwise known as their ‘basis period.’
What is a ‘basis period’?
The ‘basis period’ is ordinarily a 12-month period, ending on the same day each year, in which an individual’s profits or losses are calculated. The end of the basis period determines the tax year in which profits are taxed, for example, if an individual’s basis period ends on 30th September 2022, then their 12 months' profits will be taxable in the 2022/23 tax year.
How is the basis period changing?
The Government reform, also referred to as the ‘changing of the basis period,’ will see all basis periods fall in line with 5th April tax year end, or 31st March as HMRC accept this to be a reasonable substitute. The main aim of the change is to simplify the taxation of business profits and to allow for Making Tax Digital for Income Tax to be implemented by HMRC.
Potential to pay tax twice in a 12-month period
The new basis period rules will be completed in the 2024/25 tax year, however, there are transitional rules which apply in the 2023/24 tax year. During the transitional period, some businesses will experience double taxation of their 12 months' profits, firstly of their original basis period date, plus the period from the end of their basis period to the 5th April (31st March) 2024. For example, if an individual’s basis period ends on 30th September 2023, they will be taxed on profits arising in the 12 months from 1st October 2022 to 30th September 2023, plus the additional profits from 1st October 2023 to 5th April (31 March) 2024.
Example:
On the current basis period the 2022/23 tax due would include the period
12 months to 30th September 2022
Following the basis period reform, the 2023/24 tax return would include
12 months to 30th September 2023
plus
6 months to 31st March 2024
During the transitional period, the taxation of two periods may create significant tax balances, therefore it is essential to look to the future to prepare yourself and your business for this major reform.
That being said, there are a number of planning opportunities available to ensure any potential tax exposure can be managed effectively and promptly. If you wish to discuss the basis period reform, please contact your Armstrong Watson relationship manager.
If you do not have a contact within Armstrong Watson and would like to discuss the change and how they will affect your business, please get in touch.
