Change in tax basis periods for the self-employed
Please note: this DOES NOT affect limited companies, OR sole traders and partnerships that already do their accounts to a 31st March or 5th April year end. It DOES affect sole traders or partnerships that do their accounts to a different year end.
On 20 July, the government announced a consultation (with draft legislation) for reforming the basis period system for the self-employed and partners.
This proposal changes the way trading income is allocated to tax years.
Generally, businesses draw up annual accounts to the same date each year, called their ‘accounting date’. Currently, a business’s profit or loss for a tax year is usually the profit or loss for the year up to the accounting date in the tax year, called the ‘basis period’. Specific rules determine the basis period in certain cases, including during the early years of trading. These rules can create overlapping basis periods, which charge tax on profits twice and generate corresponding ‘overlap relief’ which is usually given on cessation of the business. Overall, this basis of taxation is called the ‘current year basis’.
This proposal changes this to a ‘tax year basis’ with effect from 2023 to 2024, so that a business’s profit or loss for a tax year is the profit or loss arising in the tax year itself, regardless of its accounting date. This removes the basis period rules and prevents the creation of further overlap relief. On transition to the proposed tax year basis in the tax year 2022 to 2023, all businesses’ basis periods would be aligned to the tax year and all outstanding overlap relief given.
Please speak to us if you are concerned about how this may affect your business.