Basis period reform is introduced for tax years 2024/2025

The government has confirmed the introduction of basis period reform starting for tax years 2024/2025.

This measure changes the way trading income is allocated to tax years for sole traders and partnerships and ensures from 2024/2025 onwards that all sole traders and partners will be taxed on profits made in the tax year.

Currently businesses such as sole traders and partnerships are taxed on the profits of the 12-month period that ends within the tax year. For example, a business with a year-end of 31^st December 2022 will be taxed in the 2022/2023 tax return (covering 06.04.2022 to 05.04.2023).  Under the new rules, for tax year 2024/2025, businesses with a year-end of 31^st December will be taxed 270/365ths of their profits for the year-ended 31.12.2024 and 95/365ths of their profits for the year-ended 31.12.2025.

The tax year 2023/2024 will be an important year as it will act as a transitional year towards the new rules and for most businesses this will mean more than 12 months of profits being taxed.

What will the transitional year mean for a business with a year-end of 31^st December 2023?

It means they will be taxed on:

• The profits for the year-end 31^st December 2023 and
• The profits for 1^st January 2024 to 5^th April 2024
• 15 months of profits will be taxed in tax year 2023/2024, three months more than the traditional 12 months using the old rules.

To reduce the impact of the transitional rules, businesses are allowed to:

• reduce the additional profits charged from the transitional period if they have overlap profits from when they started trading.  In the example above, this will be the additional profits from the 3 months to 5^th April 2024.
• spread any transitional profits remaining over a period up to five years from tax year 2023/2024.

The deadline for payment for any tax due remains the same. For example, for tax year 2023/2024 tax is still due on 31^st January 2025 and for tax year 2024/2025 tax is still due on 31^st January 2026.

Top Tip

Businesses with a year-end not on 31^st March or 6^th April should consider changing their year-end provided it is suitable for their individual business circumstances. Going forward this will simplify the tax calculation as what is taxed will be what is in the accounts and not a mixture of two different sets of accounts.