Basis Period Reform: What Sole Traders and Partnerships Need to Know

28 March 2024

Attention sole traders and partnerships! A significant change to how you pay taxes is coming into effect on April 6th, 2024. This reform, known as basis period reform, will impact how your business profits are taxed.

What’s Changing?

Previously, unincorporated businesses were taxed on profits earned in their accounting year, regardless of when that year ended. Under the new system, your business will be taxed on profits made within the tax year, which runs from April 6th to the following April 5th.

Who’s Affected?

If your accounting year end is already March 31st or April 5th, this change will not affect you. However, businesses with accounting year ends falling on any other date will need to adjust their tax calculations.

Why the Reform?

The government aims to streamline the tax system and improve compatibility with the upcoming Making Tax Digital program. This should lead to a smoother digital tax experience in the long run.

Potential Short-Term Impacts

In the first year (2023/24), some businesses might see a higher tax bill due to the transition. This is because the tax calculation will be based on a longer period for businesses with non-standard year-ends.

Minimising the Impact

There are ways to minimise the impact of basis period reform on your business. Here are some options:

  • Overlap Relief: This relief may be applicable to help offset the tax charged on profits taxed twice during the transition period.
  • Spreading Profits: You might be able to spread the additional profits over several tax years to ease the burden.

What to Do Now:

  • Prepare for Potentially Higher Tax Bills: Be aware of the potential for a higher tax bill in the next few years.
  • Adjust Year-End Accounts and Tax Returns: You may need to adjust your year-end accounting and tax return processes to accommodate the new system.
  • Talk to Your Accountant: A qualified accountant can advise you on the specific impact of basis period reform on your business and help you navigate the transition smoothly. They can also explore options like:
    • Cash Flow Assessment: Analyse the potential cash flow implications of the reform for your business.
    • Tax Band Optimisation: Assess the risk of being pushed into higher tax brackets due to the reform and suggest strategies to mitigate this.
    • Damage Limitation Strategies: Develop plans to minimise the negative impacts of the reform on your business.

Don’t wait! By understanding basis period reform and taking proactive steps, you can ensure a smooth transition and minimise any potential disruptions for your business.

Ready to minimise the impact of basis period reform and ensure a smooth tax transition? Contact Green & Co Accountants and Tax Advisors today for a consultation! We can help you navigate the new system and optimise your tax strategy.

Author
Nick Park FCCA,Director
Basis Period Reform

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