Basis period reform

The rules dictating when the trading profits of unincorporated businesses are subject to income tax are changing.

From April 2024, the existing basis period rules (the ‘current year basis’) will be abolished and replaced with a tax year basis of assessment. Under the tax year basis, businesses will be subject to tax on their profits arising in the tax year, regardless of when their accounting period ends.

For businesses which already have a year end of between 31 March and 5 April, there is very little change.

However, for businesses with year ends of any other dates, the tax year 2023/24 will act as a transitional year, in which businesses switch over from the current year basis to the new tax year basis. In this transitional year, the basis period will be made up of two different elements, namely:

• a 'standard part' being the normal basis period (i.e. the 12 months following the end of the basis period for 2022/23)
• a 'transition part' running from the end of the standard part to 5 April 2024 (or 31 March 2024 if accounts are drawn up to that date).

In effect, businesses will be required to bring into account an additional amount of profits running from the end of their normal basis period to the end of the 2023/24 tax year. Two measures are allowed to reduce the impact of this:

• businesses can deduct any overlap relief they may have from the additional transition part profits (this is also available to businesses with year ends of 31 March to 5 April
• any remaining transition profits can then be spread over a period of up to five years.

Whilst the rules have been trailed for some time, it is only recently that HMRC have clarified how they will distribute details of overlap relief which may be available. To read more see the HRMC guidance.