Basis Period Reform: what you and your clients need to know

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Basis Period Reform brings the basis period for income tax in line with the tax year. The measure impacts sole traders and partnerships – particularly those who don’t use the tax year basis already. Instead of reporting profits from a client’s accounting year on their income tax return, you need to report the profits generated during the tax year.

Here, we take a quick look at what Basis Period Reform means for your practice and clients.

Basis Period Reform timeline (and examples)

There are two phases to Basis Period Reform: 

The 2023/24 tax year is a transitional period
Clients who don’t align their accounting period with the tax year will have a longer basis period for the 2023/24 tax year. You’ll need to apportion profits from their accounting period, plus the period that brings them up to April 2024 (the end of the 2023/24 tax year) to submit their income tax return. Note: HMRC accepts 31 March – 5 April accounting dates as tax year aligned.

The 2024/25 tax year is when the measure comes into full effect
All sole traders and partnerships need to use the tax year basis. For clients who don’t move their accounting date, you’ll need to apportion profits from their two accounting periods that fall within the tax year.

Here’s an example:

Your client, Lucy, has a 31 December year-end.

For Lucy’s 2023/24 tax return, you will need to report profits from her accounting period, plus the transitional period up to the end of the 2023/24 tax year.

So that’s 1 January 2023 – 31 December 2023 (Lucy’s accounting year) plus the transitional part, 1 January 2024 – 31 March 2024. A total basis period of 15 months.

As a result, some clients could face higher tax bills for the transitional year. HMRC is allowing these taxpayers to spread overlap profit bills across five years.

The impact for you and your clients

If clients decide to keep their accounting dates, you’ll need to prepare two sets of accounts for them – one for internal reporting, and another for their income tax returns.

In some cases, providing final figures for clients with accounting dates that fall later in the year won’t be possible. Instead, you’ll need to provide provisional figures when the return is due and submit final figures in their next tax return. That means two sets of accounts and two tax returns per client, per year.

Having cloud-based software in place will help you handle the additional admin. Xero makes it easier to draw up sets of accounts for your clients’ internal reporting and HMRC. Plus, using automation features like bank reconciliation means you can match transactions faster and spend less time on admin – and more time supporting your clients. 

Preparing your practice and clients

Basis Period Reform changes the way your practice and clients prepare for income tax returns. It’s therefore important to spend some time brushing up on the new rules, segmenting your client base, and advising clients on the help available.

In our complete guide to Basis Period Reform, we share tips for preparing your practice and clients, and explain how software can lift the administrative burden for you.

Read our complete guide to Basis Period Reform

This content is brought to you by Xero.

Xero offers a cloud-based accounting software platform for small and medium-sized businesses..

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