The UK tax landscape has undergone significant changes, which could affect a wide array of taxpayers, including self-employed individuals and members of partnerships.
In this blog post, we aim to clarify the recent alterations to the basis period, a fundamental element in calculating taxable income for business profits. As we move through 2024 and into 2025, understanding these changes is crucial for accurate and efficient tax planning.
What is the basis period?
Traditionally, the basis period for tax refers to the specific time frame for which a business’s profit is assessed for tax purposes. Until recently, businesses could have their income assessed differently, depending on their accounting date. This often led to confusion and sometimes resulted in businesses paying tax on profits effectively being taxed twice. The rules were particularly convoluted for those whose accounting date did not align with the tax year, which runs from 6 April to 5 April the following year.
The new changes for 2023/24
From the tax year 2023/24 onwards, the UK Government streamlined this process by aligning the basis period with the tax year. This change means that all unincorporated businesses will be taxed on the profits earned in the tax year, regardless of their accounting date.
How does this affect you?
This alteration is designed to simplify business profit taxation and ensure that business owners pay tax on profits in the year they are earned, not in advance. It aims to eliminate overlap relief and reduce the confusion surrounding the shifting basis periods many businesses previously encountered.
For most, this will mean a transition period during the 2023/24 tax year, where your tax basis period will be adjusted to align with the tax year end. If your accounting date is, for example, 31 July, you will need to assess profit from 1 August 2022, to 5 April 2023, as your basis period for 2023/24. This transition could lead to a larger-than-usual tax bill in the adjustment year as you ‘catch up’ to align your accounting period with the tax year.
Planning for the transition
It’s crucial to plan for this transition to manage your cashflow effectively. We recommend reviewing your current and projected profits with an accountant to understand how the change may impact your tax bill. Additionally, if your business experiences significant seasonal fluctuations, this could affect your taxable profits for the transitional period.
Benefits of the change
While the transition might seem daunting, the long-term benefits include simplified tax reporting and planning. A single, consistent basis period that aligns with the tax year will make it easier to predict tax liabilities, and the potential for errors or discrepancies in tax returns due to basis period adjustments will be markedly reduced.
Next steps
Here are some steps we recommend to prepare for these changes:
- Review your accounts: Ensure your financial records are up-to-date and accurate. This will provide a clear picture of your business’s financial health and help anticipate the tax impact.
- Consult with professionals: It is more important than ever to engage with an accountant or tax advisor. They can provide personalised advice and strategies to mitigate negative impacts from the basis period change.
- Cash flow management: Consider the impact of potentially higher tax bills during the transition year and plan your cash flow accordingly. It may be prudent to set aside additional funds to cover the expected increase.
- Stay informed: Keep updated with any further guidance from HMRC or updates that may affect implementing these changes.
The shift to a tax-year basis period is a significant change that will require careful planning and consideration. By understanding these changes and taking proactive steps, you can ensure that your business continues to operate smoothly and efficiently under the new rules.
We are here to help
At P.B. Syddall & Co., we are here to help guide you through these changes with expertise and reassurance. Feel free to contact us to discuss how we can support your business through this transition. Remember, while change can be challenging, it also brings opportunities for clarity and growth in your business tax affairs.
Contact us for help with your business.