Press Room

23 Jun 2022

Income Tax – Basis Period Reform

Anthony Lampard, Director, examines the Finance Act 2022, which is attempting to simplify income tax administration in advance of the commencement of making tax digital, and discusses the practical issues.

The Finance Act 2022 which received Royal Assent in February 2022, includes legislation to amend basis periods for income tax purposes. The driver for this, which will apply to sole traders and partnerships, is to simplify income tax administration in advance of the commencement of making tax digital.

The intention is that whilst businesses can retain their current year end, or amend it in the light of these changes, there will be a consistency in working out the taxable profits for all self-employed individuals. These will be based on taxable profits for the relevant fiscal year.

Who is affected?

Any individual or partnership that does not either currently have a 31 March or 5 April year end.

When do the changes apply?

The changes are twofold:

  • A transitional period – for 2023/24 i.e. 6 April 2023
  • New rules apply – from 2024/25 i.e. 6 April 2025

Transitional Period

This will be made up of two separate periods:

  • Standard period – accounts to the end of the taxpayer’s normal accounting period. For this example – 31 December 2023
  • Transitional period – 1 January 2024 – 5 April 2024. Calculated on an average daily profit for that period.
  • The current overlap profits will be offset against the transitional period profits.
  • If the net transitional period shows a profit, after deducting the overlap profits, then the taxpayer can spread these profits equally over a period of up to 5 years. However, each taxpayer can advance the profits taxed in a specific year and where the business either ceases or the individual retires, then any remaining profits are taxed in the year of cessation.
  • Where there is an overall loss during the transitional period, this can be offset initially against the profits of the standard period. Where the losses exceed the standard period profits, then terminal loss relief can be claimed.

Taxable Profits for 2024/25

For this year, if the business retains their 31 December year end, the taxable profits will be as follows:

  • 31 December 2024 – 9 months profit
  • 1 January 2025 – 31 March 2025 – 3 months profits for the year to 31 December 2025

Changing of Accounting Period

Many businesses may want to alter their accounting date. However, this will not be possible if they have done so previously in the last 5 years or alternatively where the new accounting period exceeds 18 months.

If these constraints can be avoided, then businesses should avoid changing their accounting date until 2023/24. To do so earlier impacts the ability to claim the spreading provisions for the transitional period.

Capital Allowances are going to be claimed based on expenditure incurred during the tax year, not based on the accounting year. May this be a driver for changing the accounting year end?

Practical Issues

  • In calculating the transitional profits and whether to spread them – consider the possibility of tax rates changing.
  • The transitional profits will impact the scope to pay pension contributions.
  • Where the business retains its current year end, how to estimate the taxable profits for the rump, especially where the accounting year has not yet finished, or it is a seasonal business such as farming or a hotel?
  • How will estimated profit figures be amended? Do you amend the relevant tax return or adjust it via the following year’s tax return?
  • How will these rules apply for international partnerships, where the scope to amend their accounting year end, may not be an option?

These are a selection of issues that HMRC and the profession are discussing to see how best to deal with.

Future Plans

  • Making income tax digital – this applies from 6 April 2024 for sole traders and unincorporated landlords; this deadline is extended by one year for partnerships.
  • There is a need to make quarterly returns where the gross income exceeds £10,000 (and combined if have two businesses) and report income and expenses digitally. These will be initially accounting records, annual reports for both accounting and income purposes and the need to report the tax figures on the individual’s tax return.
  • Although not currently proposed, it is expected that quarterly tax payments will be introduced in the future. This will reduce the current cash flow benefit for self-employed individuals compared with employees.

If you want to discuss further, please contact Anthony Lampard.