Autumn Budget: Basis Period Reform

In a move to rapidly transition to the long-held government aim of Making Tax Digital (MTD) for income tax, a proposed change to the way profits are taxed for unincorporated businesses that do not use a 31 March or 5 April accounting year-end will be introduced. 

The proposals change the basis period from a ‘current year basis’ to a ‘tax year basis’, which would mean taxing those profits on a tax year basis rather than an accounting period. The target date to implement the changes was the 2022/23 tax year, however following further consultation, it has been announced that the year of transition will be 2023/24 tax year, and the new rules will then come into force from 6 April 2024, in line with the proposed date for Making Tax Digital. In the year of change, businesses who do not have a year-end of 31 March will be taxed on the profits for an extended period, less any overlap profits brought forward. 

There is no requirement to change the accounting year-end of the business, just the way in which profits are taxed. This, however, may confuse matters, and we envisage that most accounting periods will change to a 31 March year-end.

We anticipate that the change will be effected through the Finance Bill in due course.

Impact

A worked example may be best to demonstrate how this works. Under the current rules, if a business has a normal accounting year-end of 30 September, in 2022/23 the individual will be taxed solely upon the profits for the year ended 30 September 2022.

In the following year, under the new rules, the individual will not only be taxed on the profits for the year ended 30 September 2023 but also the profits for the period from 1 October 2023 to 31 March 2024. The overlap profits brought forward from when the business commenced or the accounting period changed, are then deducted as follows:

2023/24
Year ended 30 September 2023100,000
Period 1 October 2023 to 31 March 2024  50,000
Total150,000
Less overlap profit brought forward (20,000) 
Taxable profit130,000

As can be seen above, a significant impact will be made on cash flow if profits of £100,000 are regularly taxed and now profits are to be taxed of £130,000. However, the government has announced that the additional profits which become taxable as a result of this change, £30,000 in this case, can be taxed at £6,000 per year over the 5 years 2023/24 to 2027/28, which eases cash flow issues.

It may be that overlap profits are considerably higher than stated above. If an individual only started the business in 2019/20, their overlap profits will be based upon more current earnings. The overlap relief may be greater than the extra earnings being taxed for the extended period. If this is the case, an election can be made to disapply of the 5-year spreading of the taxation.

For more expert Autumn Budget insight and analysis, please visit our Budget hub.