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Basis Period Reform: What does it mean for your business?

You may have heard the phrase ‘basis period reform’ circulating recently – particularly over the past week! HMRC’s reforms to the basis period method for taxation are now in full swing, impacting unincorporated businesses and limited liability partnerships (LLPs). These changes have altered how profits are taxed, significantly affecting financial planning and cash flow for affected businesses. Therefore, it is vital to understand these changes to avoid being caught out.  

We can help you to navigate these changes, working alongside you to ensure a smooth transition for taxation purposes. 

Transition Period: Tax Year 2023/24 

Under previous rules, taxation was based on the financial performance of the business in the 12-month accounting period ending in the tax year. However, the new regulations mandate that profits will now be taxed based on the tax year itself, starting with the 2024/2025 tax year, regardless of the business’ accounting year-end.   

The previous tax year, 2023/24 was a transition period for these reforms. For profits during this time, individuals will be taxed on a longer period of account ending on 5th April 2024, accounting for all previously untaxed profits up to that date. Relief will be granted for any overlap profits generated under the previous basis period rules.  

Which businesses are impacted by the reform?  

The basis period reform will affect unincorporated businesses, including self-employed traders, partners in trading partnerships, and other unincorporated entities with trading income. Additionally, businesses benefiting from government tax schemes like R&D tax credits may also experience an impact from these reforms.  

Mitigating Cash Flow Impacts   

To mitigate the impact of these changes on cash flow, HMRC has implemented rules allowing the spread of transitional profit liabilities over five years, starting from the year of transition. This alleviates the immediate tax burden on affected businesses, providing a more manageable approach to adapting to the new system.  

Aligning Accounting Practices  

Businesses now face the decision of whether to align their accounting year-end with the tax year to simplify taxation processes. While this alignment may streamline administrative procedures, it’s crucial to consider its implications on cash flow and tax liabilities. Planning for this change is strongly advised to mitigate potential administrative burdens and ensure a smooth transition to the new regime.  

We understand that every business is different, and deciding whether to align accounting periods with the tax year must be considered on a case-by-case basis. For more detailed guidance and support with the basis period reform, please don’t hesitate to get in touch with a member of the team on 01942 816512 or email: 

Chris Barlow, Tax Manager: [email protected] 

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