Understanding HMRC Basis Period Reform – what’s the impact on practices?

Currently, businesses work out their taxable profits using their accounting period. This period can end at various points during the tax year, meaning different businesses calculate taxes for different times. But, from the tax year 2024/25, sole traders and partnerships will pay Income Tax based on the profits generated during that tax year.

The Basis Period changes will impact:

● sole traders and partnerships with an accounting period end date that falls outside 31 March to 5 April

● new businesses that begin operating from 6 April 2024.

In this explainer, we share key information on Basis Period Reform, HMRC guidance on the new rules, and answer the most common questions so you can support your clients.

What is a Basis Period?

A Basis Period is the timeframe used to calculate tax. For Income Tax, the current Basis Period rules mean Income Tax is calculated on the profits earned during a business’ accounting period.

Example of a Basis Period

Generally, businesses work out their annual accounts using the same year-end date. This is known as an ‘accounting date’. If a business has an accounting year-end date of 31 October, taxable profits will be calculated from 1 November 2021 to the year-end date of 31 October 2022 for the 2022/23 tax year. This means the Basis Period is your client’s accounting period.

But from the 2024/25 tax year, HMRC's Basis Period Reform means all unincorporated businesses will use the UK tax year of 6 April to 5 April for Income Tax Assessment.

What is the difference between ‘accounting period’ and ‘Basis Period’?

For many businesses, their accounting period and Basis Periods are the same. But if a business was set up in the middle of a tax year, the accounting period could run from, for example, 1 June to 31 May.

⦁ The accounting period is chosen by the business and used to produce financial reports. For example, they could prepare financial statements for a year-end of 31 October.

⦁ The Basis Period is the window of time HMRC uses to calculate a business’ Income Tax liability as well as for wider tax purposes.

Two similar definitions to note are the tax year and the financial year. You might see the terms used interchangeably, but they can have slightly different meanings:

⦁ The tax year is the 12 months used for tax reporting, compliance, and allowances. It’s set by the government, and in the UK runs from 6 April to 5 April.

⦁ The financial year (or, fiscal year) is also a 12-month period used for reporting. But the dates can vary depending on several factors, such as the business’ trading activities, revenue cycles, and tax reporting requirements.

The main difference between the tax year and financial year: UK tax years are set by the government whereas business' financial year dates can vary.

What is the Basis Period Reform?

The Basis Period Reform will change the window of time when Income Tax is calculated. In short, you’ll use the tax year instead of a business’ accounting year as the Basis Period.

Currently, unincorporated businesses are assessed for Income Tax based on the profits made during their accounting year. Under the new Basis Period Reform rules, these businesses will be assessed for Income Tax based on the UK tax year (6 April to 5 April). This change comes into place for the 2024/25 tax year, with transitional rules applying in tax year 2023/24.

From the 2024/2025 tax year, a business’ Income Tax liability will be calculated based on their profit or loss during the UK tax year.

Your clients can still use different accounting dates that don't align with the tax year. But you'll need to apportion profits from their two accounting periods that fall within the tax year.

Impact of Basis Period Reform transitional rules

Given that some of your clients might have a unique accounting period, they could have a longer Basis Period in the transitional year. You’ll need to report profits that arise in their accounting period, plus the extra period that takes them to the end of the 2023/24 tax year.

Here’s an example of Basis Period Reform calculations for the transitional year:

Your client has a 31 December year-end. For their 2023/24 return, you need to report profits arising between 1 January 2023 and 31 December 2023 (their accounting period). Then, you’ll need to add on the part that takes them up to the end of the 2023/24 tax year – profits generated between 1 January 2024 - 31 March 2024.

Note: HMRC considers the dates 31 March - 5 April to be tax year-aligned.

For your clients, this will likely mean a higher tax bill for the transitional year. And for your practice, this will probably mean an increase in admin while you calculate their transitional year profits.

Which businesses are impacted by the Basis Period Reform?

The change will affect unincorporated businesses which are:

⦁ Self-employed traders, including individuals with a profession or job

⦁ Partners in trading partnerships including limited liability partnerships (LLPs)

⦁ Other unincorporated entities with trading income, like trading trusts and estates and non-resident companies with trading income charged Income Tax

While only 7% of sole traders are expected to be affected by Basis Period Reform, partnerships are more likely to be impacted (33%). During the Basis Period Reform transitional year, some of your clients might have changed their accounting date in line with the new tax year basis.

If clients choose to keep their non-tax year-aligned accounting date and it falls later in the year (e.g. November), you may need to provide provisional figures for their Income Tax returns.

Specific impact of the Basis Period Reform on partnerships

If partnerships choose not to align their accounting date with the tax year, individual partners will need their advisors to continue apportioning profits for their Income Tax returns.

Basis Period Reform could impact cash flow depending on whether partners decide to spread transitional period profits. As their accountant or bookkeeper, now is a great time to do some cash flow modelling so you can explore various outcomes and decide on the best approach for your client.

What does Basis Period Reform mean for self-employed individuals?

Self-employed people who already use the tax year basis as their accounting period can continue as normal. But if a self-employed individual has a different accounting period, HMRC Basis Period Reform could mean submitting estimated profits for at least part of their accounting period.

To do this, they’ll need to use HMRC’s guidance for calculating their profits. As their accountant or bookkeeper, you must be prepared to help your self-employed clients with this change.

For all clients affected by Basis Period Reform, higher tax bills for the transitional year could be a worry. Make sure you reassure them that there’s Basis Period Reform overlap relief available, and that they’ll be able to spread overlap profits over five years to support cash flow.

Preparing for Basis Period Reform

So, what is Basis Period Reform changing for your practice?

While the impact of Basis Period changes won’t be felt by most self-employed people, some of your clients with non-tax year-aligned accounting dates will need extra support. This might be taking care of the administrative burden, or signposting them towards HMRC guidance and overlap relief.

As with other legislative changes, accountants and bookkeepers will find themselves in the educator role for clients. Make sure you and your team brush up on Basis Period Reform rules. And look out for tools that can help you with compliance.

Xero accounting software uses automation to speed up everyday bookkeeping and improve accuracy. So whether you’re preparing a single client return or internal reports, you always have the right information to hand.

This article has provided a top-level guide to understanding HMRC Basis Period Reform. If you'd like an in-depth exploration of the legislation, read our extensive guide. You can also explore our guides for accountants and bookkeepers for more helpful content.