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  • Writer's pictureClive Cass

Basis Period Reform – for self-employed individuals and all partnerships/partners

New legislation taking effect in 2023/24 will affect non-corporate trading businesses that prepare accounts to a date other than 31 March or 5 April. So, if you work with sole traders preparing accounts to 30 June (for example) or partnerships preparing accounts to, say, 31 December, read on! The legislation, contained at Schedule 1 of Finance Act 2022, alters how the taxable profits of accounting periods are matched into tax years for the purposes of self-assessment profit reporting and income tax calculation.

Current year basis

Of course, at the moment, we use current year basis and, referring to the example dates mentioned above, when preparing self-assessment tax returns for 2021/22, the 30 June 2021 and 31 December 2021 year ends would have been used as the ‘basis of assessment’ for 2021/22 trading profits (assuming that these businesses were not starting, ending or changing year-end).

Tax year basis

From tax year 2024/25 onwards, a tax year basis of assessment will apply. This is not a requirement to prepare accounts to 5 April each year (although a number of traders will now inevitably choose to do so – see the basis period tools referred to at the end of this article) but the legislation now requires apportionment of the tax adjusted results from each accounting period into tax years.

So, for example, the sole trader preparing accounts to 30 June will need to take the tax adjusted results for 30 June 2024 and 30 June 2025 and:

  • Calculate 86/366ths of the 30 June 2024 tax adjusted results; and

  • Add 279/365th from the 30 June 2025 tax adjusted results,

Useful link – HMRC have recently provided guidance on this process – click here to see it.

Of course, in some cases, the self-employed individual will not be able to finalise the figures that need to be included in their Self-Assessment tax return by the filing date, which remains as 31 January following the tax year in question. They may need to submit provisional figures and then build in time (or pay their agent) to amend them later. Individuals affected in this way will likely want to talk about options for changing their accounting year-end (see below).

Interaction with Making Tax Digital for Income Tax

Of course, it is no coincidence that Making Tax Digital for Income Tax is also set to start from 6 April 2024. From this point onwards, mandated businesses (initially self-employed individuals and property landlords with trading / property income in excess of £10,000 per annum) will be required to submit quarterly summaries of their income and expenditure. These will always be aligned to the tax year and start on 1 or 6 April 2024, regardless of the accounting period start and end.

For our sole trader, by the time he undertakes his 2024/25 profit computation (above) he will have already provided HMRC with income and expenditure summaries for the:

  • Quarter to 5 July 2024 (or 30 June 2024);

  • Quarter to 5 October 2024 (or 30 September 2024);

  • Quarter to 5 January 2025 (or 31 December 2024); and

  • Quarter to 5 April 2025 (or 31 March 2025).

These quarterly summaries will likely not have been adjusted for accruals, prepayments, tax add backs and capital allowances, to name a few.

An annual reconciling figure to get from the MTD submissions to the tax year basis computation will therefore be required. This will be done on the MTD ‘End of Period Statement’, which must be filed by 31 January after the tax year in question. This reconciling figure is likely to mean very little to the business owner and attention will turn to the advisor / accountant to explain the adjustment.

Transition in 2023/24

The tax year 2023/24 will be a transitional year where, in addition to the accounting results that are brought into account under the normal ‘current year basis’ (referred to in Finance Act 2022 as the ‘standard component’), a ‘transitional component’ is also brought into charge to represent the period from the end of the current year basis period to 5 April 2024. Overlap profits are then deducted in full.

Spreading rules apply where the transitional component exceeds the amount of available overlap relief. These rules will automatically spread the ‘excess profits’ evenly over 5 years, starting with 2023/24, unless the self-employed individual elects to accelerate the spread or ceases trading (in which case all remaining sums come into charge).

For example, the sole trader referred to above would compute their 2023/24 results by:

  • Bringing in the tax adjusted results from 30 June 2023, say

  • Adding 280/366th of the 30 June 2024 tax adjusted results,

  • Deducting overlap relief, say

  • Deducting profits spread into the next 4 tax years*

  • 20,000

  • 15,000

  • 5,000

  • 8,000

  • 22,000

*The ‘excess profits’ would be computed as £15,000 (transitional component) – £5,000 (overlap) = £10,000 and spread over 5 years. The first £2,000 would be treated as arising in 2023/24, leaving £8,000 spread into the next four tax years.

Useful link – HMRC’s guidance on the transitional rules is here – click here.

Useful link – HMRC’s guidance on spreading is here – click here.

If a loss arises as a result of this process, extended loss relief rules apply to any element attributable to the overlap relief deduction. These rules effectively deem that overlap related part of the loss to be ‘terminal’, effectively facilitating a 3 year carry back option. However, as the trade is continuing, carryforward loss relief options also remain.

Useful link – HMRC’s guidance on loss relief in these circumstances is here – click here.

Useful Resources from 2020 Innovation

Your Making Tax Digital for Income Tax Action Plan – join Sharon Cooke and the 2020 team on our Tactics for Success Roadshow running at various venues in May and June 2022.

Exclusive resources for 2020 members

The ‘MTD for Income Tax marketing resource’ can be downloaded from the Practice Development Tools section of your member Dashboard. It is filed under ‘Adding Value to Your Clients’. This resource includes suggested letters and social media posts to send to your clients now.

The following training courses help you and your team get ready for these changes:

  • Tax Update Webinar from 4 March 2022 – Martyn Ingles runs through the basis periods rules and terminal loss provisions. Available on-demand now.

  • Making Tax Digital for Income Tax with Martyn Ingles – live on 19 April 2022 (and on-demand afterwards)

  • Finance Act 2022 with Rebecca Benneyworth – live on 24 May 2022 (and on-demand afterwards)

There are more MTD related training courses to come later this year and throughout 2023. Remember to bookmark the information hub webpage referred to above.

Exclusive resources for 2020 platinum members (and subscribers to Tax, Tips and Tools)

The 2022/23 update to Tax Tips and Tools is imminent. Upgrades include tools especially designed to help you advise your clients on the impact the basis period change will have on them and whether they should change year end (in 2021/22, 2022/23 or 2023/24). There is not a single or simple answer to this question as it depends on the client, commercial reasons for their year-end and their recent and expected financial results. Without doubt, these tools are a time saver for the proactive advisor.

The new tools are:

  • Basis Period Reforms Toolkit – a comprehensive model of matters to consider NOW, and the calculations on the change of basis periods. The scenarios need to be considered now, as it is possible the time to change year end is March 2022!

  • Basis Period Reforms Tracker – linked to the above exercise, this is a tracking tool to list those that will be affected by the reforms and the figures needed to perform the change of accounting date exercise.

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