Accountants will be aware that the government’s Basis Period Reforms are due to be implemented for the 2024/25 tax year. This means unincorporated businesses with trading profits used for income tax purposes will need to produce accounts based on the relevant tax year. Transitional rules apply for the 2023/24 tax year for businesses where the accounting year and the tax year do not match.
For accountants with sole trader or limited liability partnership clients, the reforms are important and will require a careful review to identify those where the accounting year does not end on 31 March or 5 April.
This guide aims to provide accountants with an understanding of the Basis Period Reforms and the action they can take to ensure sufficient resources are available to implement them. Using an outsourced accountant such as Initor Global can provide valuable capacity to ensure the transition to the new rules is managed effectively.
What are the government’s Basis Period Reforms?
The government is reforming the way income tax is paid by individuals taking income from unincorporated businesses. In concept, the reforms are relatively straightforward and should make the calculation of income tax easier. However, the implementation of the reforms for certain clients may be complex and will require additional resources for accountants to manage the transition.
For the 2024/25 tax year, all affected businesses will need to use the tax year as the basis for calculating the income tax paid by individuals to HMRC on profits. This means an accounting period will need to end on 31 March or 5 April each year. While many unincorporated businesses already use these dates to calculate the amount of income tax due, some businesses, for often good reasons, prefer to adopt a different accounting period. It is these businesses accountants will need to understand in more detail before discussing the implications of the reforms with clients.
What do I need to do to prepare?
HMRC has said it will write to all individuals affected by the Basis Period Reforms. However, it would be unwise for accountants to await the receipt of a letter from HMRC before reviewing their clients’ needs. Accountants need to be proactive about the impact of the reforms. At a minimum, accountants should carry out a full review of their sole trader and limited liability partnership clients to identify those affected. Clients should then be contacted individually to discuss the options available to them.
Where a client needs to change their accounting period to match the tax year, the impact on their tax position will need to be calculated. Some clients may need to have additional funds available to pay their tax earlier than usual, especially where their accounting period ends later in the calendar year.
HMRC has made the 2023/24 tax year a transitional year to allow accountants and their clients time to prepare. This means the self-assessment tax returns for affected clients to file by 31 January 2025 must follow the new rules and may need to contain estimates calculated by the accountant. Accountants will need to make sufficient resources available to collect the information and data needed to explain the tax calculations to individual clients.
How will the transitional tax year affect accountants?
For the transitional tax year ended 5 April 2024, businesses will be taxed based on their accounting year end with an additional calculation of tax to the end of the tax year. A business with an accounting year end date of 31 December 2023, will need to account for trading up to 5 April 2024 for income tax purposes. For simplicity, most accountants will use 31 March 2024 as a basis for the additional calculation.
Businesses who have chosen an accounting period ending earlier in the tax year, such as 30 April, will be significantly affected as they will need to use the trading period end date of 30 April 2023 and estimate profits between 1 May 2023 and 31 March 2024 to calculate income tax due for the 2023/24 year. For accountants, this means a significant amount of work to prepare estimates and discuss these with clients. Clients with a year-end date in April or May 2024 should consider shortening their accounting period to 31 March 2024
The government recognises some individuals will have significantly higher income tax bills to pay and has decided the additional profits included in the 2023/24 tax return will be allowed transitional relief for a period of five years to spread the cost of the additional tax amount. HMRC has said any additional income calculated should not result in a higher national insurance charge or any new taxes to pay such the High Income Child Benefit Charge, though accountants will need to check this. However, if a taxpayer decides to pay all income tax when due for the 2023/24 tax year and does not use the transitional arrangements, they may find their income is higher than normal and attracts a higher rate of income tax. Accountants have an important role to play in advising clients how to structure their tax liabilities and payments using the transitional arrangements.
How are overlap profits treated under the new rules?
Accountants will be familiar with HMRC’s rules on overlap profits, where unincorporated businesses can claim relief where profits are taxed twice – usually in the early years of trading or where an accounting year has changed. Overlap profits are not created where the business has a trading period ended 31 March or 5 April. Under the new rules the need to calculate overlap profits is removed completely.
If a business has outstanding overlap relief then it must be used in the 2023/24 transitional period and cannot be used in a future tax year. Where the amount of overlap relief is not easily calculated due to missing or incomplete records, accountants may need to contact HMRC for information about the amount of overlap relief to include in the 2023/24 tax return.
Action accountants need to take to get their clients ready
Accountants will need to complete a review of their unincorporated business clients to see how the new rules and transitional arrangements affect them. Affected clients will need to be contacted individually and advised on the action needed to change their accounting period to 31 March or 5 April with an estimate of any additional tax to pay and the impact on their future cash flow.
For periods where accounts have not been prepared, estimates will need to be made. These estimates will need to be revisited when accounts are finalised and amendments made as necessary to self-assessment tax returns previously filed with HMRC.
Accountants will need to review the resources they have available to prepare accounting records, complete the relevant calculations and provide the necessary advice to clients. Outsourcing the calculation of estimates and preparation of accounts, and the completion of self-assessment tax returns can help accountants create the capacity needed to implement the Basis Period Reforms effectively.
Main features of Initor Global personal tax services
UK Accounting Practices gain many advantages by outsourcing services to Initor Global, leveling the playing field with larger competitors and freeing capacity to work on upselling services. We understand the complexities involved in implementing the government’s Basis Period Reforms and have dedicated, professional resources available to support you. Ensuring compliance with HMRC’s rules can be daunting, and penalties can be excessive if a deadline is missed or incorrect information submitted to HMRC.
Our team of qualified tax specialists and accountants provide the services your clients need, with our rates typically 50% less than the equivalent service in the UK. All services are delivered to the highest professional and quality standards your Practice expects. Many of our accountants and tax specialists trained and worked for Practices in the UK.
We offer a free, no-obligation trial of our services.
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