What in the 🌍 is the basis period reform?

  • 4 min read
  • 20 Oct 2023
What is basis period reform

Looks like you have even more changes to look forward to in the 2024/2025 tax year 🥲

HMRC has confirmed that although Making Tax Digital (MTD) will no longer be launching in 2024 for everyone, the change in the basis period that was suggested will still be moving forward from 6th April 2024. 

This change will mainly affect self-employed people.

So, what is it and what does the basis period reform mean for you? Let’s try and demystify HMRC’s mysterious ways.

Wait, what happened with MTD again?

To recap, MTD is the government’s plan to switch UK personal taxes over from paper to completely digital.

It was supposed to go live several times, but the last official time was for 2024. It’s now been pushed again.

Right now, MTD is still only for VAT-registered businesses. Eventually, it’ll be for everyone who needs to file a Self Assessment tax return or pay VAT. 

Businesses, landlords and self-employed people earning:

  • More than £50,000 will have to file their taxes using MTD by April 2026
  • Between £30,000 and £50,000 will have to switch to MTD by April 2027

No word yet from HMRC on what happens to those earning less than £30,000, so we’ll have to wait and see what they say. 

What is the basis period?

Usually, you’ll draw up your annual accounts, which is just a fancy way of saying profits and tax, to the same date every year. It’s called the accounting date. Previously, profits were calculated for the year up to the accounting date. This could have been any 12-month period of your choosing, called the basis period

There are lots of rules when it comes to a basis period. In some cases, you’re taxed twice on profits – yikes. But luckily, you get something called overlap relief, usually when the business (AKA you) stops trading (AKA working). 

The basis period reform means that now profit and taxes will be reported on a “tax year basis”, going live from the 2024/25 tax year.

What is the basis period reform?  

The basis period reform means that self-employed people will have to report profits and tax to HMRC on a tax year basis and not based on accounting periods of their choosing like in previous years. 

So, in short, if your accounting period is not somewhere between 31st March and 5th April already, you’ll need to change it to line up with the tax year ending on 5th April. Accounting periods that end on 31st March, 1st April, 2nd April, 3rd April and 4th April automatically fall under the correct criteria and won’t need to be changed. The 5th April date is now in line with the future MTD dates as well. 

Reminder – the tax year runs from 6th April – 5th April.

This means that your profits now need to be reviewed and taxed in the tax year you earned them. So when you fill out your 2024/25 Self Assessment, you need to make sure you’re filling it out for the tax year and not your previous accounting period dates📝 

As we mentioned above, you’re entitled to overlap relief when you’re taxed more than you should be due to the overlapping of accounting periods.

Basically, you end up reporting repeated profits, which leads to you paying tax twice on those same profits. It’s most likely to crop up as an issue if you’re not using 5th April as the end of your accounting period. HMRC know this isn’t right, thankfully, and introduced overlap relief.

So now that you have to switch to this date regardless of whether you’ve already paid tax on certain profits, you might double up on tax payments – yikes. Luckily, you’re still entitled to your overlap relief.

However, before, overlap relief was given when you stopped trading. But this is changing too! The new basis period reform rules state that you must use all unused overlap relief in the 2023/24 tax year or you’ll lose it and won’t be able to use it after April 2024. 

Who does the basis period reform affect?

Mostly self-employed people. But it also includes partners in trading partnerships, or unincorporated businesses with trading income (like trading trusts, estates, etc). 

Specifically, within these categories, you’ll be affected if your current accounting period does not end between 31st March and 5th April. 

If it does, you’re in the clear. HMRC will treat you as if you’re already following the new rules. You can just continue business as usual when preparing your accounts😅

Pro tip💡: if you started being self-employed in 2022/23 or 2023/24, pick a date between 31st March and 5th April to end your accounting period. Then you’re following the rules and it’ll make filing your tax return that much easier💪

What do you need to do next?

You’ll still need to file your tax return as usual, but your figures will look a little different🙄

Not much else to do really, other than changing the dates of your accounting period and making sure your profits and tax are correct – a small feat and nothing that should negatively impact you, according to HMRC. Ha! 

There could also be some maths involved – sob😰

Remember, as someone who is self-employed, you need to file a Self Assessment tax return. It’s a different process as a business and you might also need to pay Corporation Tax and file a Company Tax Return.

Don’t fret though, TaxScouts is here for you! You won’t have to worry about doing it alone, because our accredited accountants will do it all for you. Read more on why we’re the ones for you here 🫶

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