In this blog post we are tackling the tricky subject of the Basis Period Reforms. We say tricky subject as the whole basis period setup that existed was often confusing, and it seems that the Governments’ escape plan also takes a bit of time to get your head around. If you are self-employed or a partner in a partnership and have a year-end that is not either 31 March or 5 April, then strap yourself in and we’ll talk through how the changes will affect you.

The old basis period system
In this case the best place to start is by looking at the current system, and the best way to explain it is by way of an example.
Simon joins as a Partner on 1 July 2021, and the partnership makes its’ accounts up to 30 June each year. Simons’ profit share in that first year to 30 June 2022 is £60,000. On Simons’ 2021/22 personal tax return he will show what is called the actual profits, which is his profit share from 1 July 2021 when he joined to 5 April 2022, being the end of the tax year. Applying this to the £60,000 means taking 9 months’ worth – so 9/12 of £60,000 = £45,000. This is the profit share Simon shows on his 2021/22 tax return. Fast forward a year and on Simon’s 2022/23 he will show the profits from the 12 month accounting period that ended in the tax year, which in this case is the 12 months ended 30 June 2022. This means that the profits in the period 1 July 2021 to 5 April 2022 (£45,000) have actually been taxed twice, and these represent Simons’ “overlap profits’.
So what are the Basis Period Reforms?
The Government has decided this is an outdated system and people should simply report their profits according to the tax year – basically whatever profit you made between the 6 April and 5 April period (although they allow 31 March to be used a year end as well). It will create a much simpler, and dare we say fairer system, as no longer will HMRC be holding on to tax on overlap profits which have often arisen when people have started to trade and can ill afford the negative cash flow effect this has. At Veritons we have often advised small businesses to set their year-end as 31 March for this very reason, but going forwards the Government is making it mandatory. The biggest complication this creates is of course to those who are already operating with a year-end that is not 31 March or 5 April. The change will come into effect for tax year 2024/25, but this means 2023/24 (the current tax year at the time of writing) is the transitional year.
Again, the best way to demonstrate how the change will affect individuals is by way of example, so taking Simon’s case above the effect will be as follows:
On Simons’ 2023/24 personal tax return he will show his share of the profits for the year ended 30 June 2023 (let’s say this was £90,000), plus his share of the profits arising between 1 July 2023 and 5 April 2024 (which in this example we will say is £67,500). This means profits of £157,500 but Simon will get relief for his overlap profits from when he joined the partnership, and so £45,000 will be deducted from this figure to give £112,500 as his taxable profits for the 2023/24 year. HMRC realise that this will represent a jump in reportable income for a lot of people. The increase caused by the change (in this case £22,500, being the £112,500 less the £90,000 Simon would normally have reported) are called the “transition profits” and can be spread over five tax years in order to provide a much wider time frame to report and pay the tax on such profits. There is an option to accelerate the reporting of these if you wish, and this will be a tax planning opportunity that we at Veritons will be looking very closely at for our clients as if used correctly it can provide for a much smoother cash flow impact.
As proactive tax advisors, we have been advising clients affected by these changes for many months. The ability to maintain close relationships by not recording our time means that we have been able to deliver tax advisory to small businesses with specific details as to how it will affect them. If you would like to discuss how the changes will affect your small business, please do not hesitate to contact us for a free discovery meeting.