Many sole traders aren鈥檛 really that interested in accounting and tax, certainly not the technical stuff. Life鈥檚 busy enough when you鈥檙e running your own business, you鈥檝e a long list of things to do and most of them are more interesting and enjoyable than tax.
But there are times when you need to understand the jargon and new rule changes, because they impact you. 鈥淏asis period reform鈥� is an example of this. If you鈥檙e a sole trader, business partner or plan to start your own sole trader business, basis period changes introduced in April 2024 may well affect you. If yours in a relatively new business, you might even lose out on tax relief.
What is the basis period reform?
- The 鈥渂asis period鈥� is the 12-month accounting period you鈥檙e taxed on, based on the figures you report to HMRC via your Self Assessment tax return.
- From the 2024/25 tax year, the basis period reform means all sole traders and business partners must use the UK tax year 鈥� 6 April to 5 April 鈥� as their basis period.
- Special transitional rules will apply in the 2023/24 tax year. As a result, some taxpayers will report profits on their 2023/24 tax return for more than a 12-month period, which could result in additional tax to pay over five tax years (2023/24 to 2027/28).
Why was the basis period reform introduced?
- Sole trader businesses can choose their own accounting periods and often it鈥檚 the same as their basis period. So, a basis period could be from, say, 1 July to 30 June or 1 October until 30 September.
- HMRC says it has introduced the basis period reform 鈥渢o create simpler, fairer and more transparent rules for allocating trading income to tax years鈥�. Previously, two very similar businesses could have very different tax bills simply because their accounting dates are different. HMRC says it wants to end this by making things fairer for sole traders and business partners.
Will the basis period reform affect you?
If your business accounting period doesn鈥檛 end between 31 March and 5 April, the basis period reform will affect how you report your business profits to HMRC via your Self Assessment tax return.
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- You鈥檒l need to use the UK tax year (6 April to 5 April) as your basis period. You鈥檒l include and pay tax on income and cost figures from between these dates, regardless of your business鈥檚 accounting period.
Can you claim Overlap Relief to reduce your tax bill?
If your accounting period ends between 31 March and 5 April, the basis period reform 飞辞苍鈥檛 affect you 鈥� unless you have unused 鈥淥verlap Relief鈥�.
- Overlap Relief can reduce your tax bill. It鈥檚 based on 鈥淥verlap Profits鈥�, which can arise if your business鈥檚 accounting period hasn鈥檛 always ended between 31 March and 5 April. This can happen in the first couple of years of a business starting or in any year when the sole trader, partner or their accountant changes the accounting period.
- If you have Overlap Profits, you must use all of your Overlap Relief in the 2023/24 transition period, otherwise you鈥檒l lose it. If you鈥檙e not sure, find out if you鈥檙e due any overlap relief.
- HMRC has published guidance on and how to . You鈥檒l then be able to (HMRC has created an ).
- You should do this long before you need to complete your Self Assessment tax return ahead of the online filing deadline of 31 January. In fact, you can complete and file your 2023/24 Self Assessment tax return now.
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