Basis period reform: what you and your clients need to know

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HMRC is changing the income tax basis period. From April 2024, sole traders and partnerships will need to use the tax year instead of their accounting year as their basis period.

For accountants and bookkeepers, this will likely mean an increase in workload. Especially during the transitional year.

In this short guide, we go over the timeline for basis period reform and explain what the new rules will mean for your practice and clients.

Basis period reform 101

Basis period reform is a measure that brings the basis period for income tax in line with the tax year. Instead of reporting profits from a client’s accounting year on their income tax return, you’ll report the profits generated during the tax year.

The new rules will impact sole traders and partnerships, specifically those who don’t use the tax year as their accounting period.

Note: HMRC accepts 31 March – 5 April accounting dates as tax year aligned.

Basis period reform timeline

The new rules will come into place over two years.

The 2023/24 tax year is a transitional period
Clients with a year-end that doesn’t match up to the tax year will have a longer basis period for the 2023/24 tax year. As their accountant or bookkeeper, you’ll need to apportion profits from their two accounting periods that fall within the tax year to file their income tax return.

The 2024/25 tax year is when the measure comes into full effect
You’ll need to use the tax year basis for all sole trader and partnership clients. Some clients might choose to align their accounting date with the tax year to simplify things. For clients that don’t want to move their accounting date, you’ll need to continue apportioning profits from both accounting periods that fall within the tax year.

Let’s contextualise this with an example:

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

For Maria’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 (Maria’s accounting year) plus 1 January 2024 – 31 March 2024 (the transitional part).

If you’ve already done the maths, you’ll know this is a 15-month basis period for Maria’s 2023/24 tax return. Tax bills for clients that don’t already use the tax year basis period are likely to be higher than usual.

Naturally, some of your clients might be concerned about cash flow during this time. You can reassure them that HMRC is allowing taxpayers to spread overlap profits over five years, to ease the burden on businesses.

Overlap relief 

Many sole traders and partnerships are double-taxed during the early years of business. As a result, they could be entitled to overlap relief – which you can claim on their behalf during the transitional year.

But finding these figures has proven to be a challenge. If clients submitted paper returns or started their business before the modern self-assessment system, those additional tax amounts could be hard to trace.

Fortunately, HMRC is developing an online form you can use to request clients’ overlap profit figures directly. And once the new rules are in place, overlap relief claims will be a thing of the past.

The impact of basis period reform for your practice and clients

Practices can expect an increase in workload as basis period reform comes into place. There’s also a chance that the legislation will complicate some financial matters for a handful of clients, too.

For example, if you have clients who choose to keep their accounting date, you might need to produce two sets of accounts for them. One for their internal reporting, and another for their HMRC tax reporting.

Also, if your client has an accounting date that falls later in the year, finalising their accounts ahead of the submission deadline might not be possible. HMRC has confirmed that you will be able to provide provisional figures if this is the case, and finalise estimates on the following tax return. Which effectively means doing two tax returns per client, per year.

Note that pension planning will also be more complex for these clients. If you provide provisional figures on their returns, then the finalised figures won’t be known until the next tax return is due. This means clients could have less clarity over the pension contributions.

Continuing to apportion profits and provide provisional figures will place a higher demand on your resources. Having cloud-based accounting software in place to automate day-to-day bank reconciliation and reduce manual data inputting will increase efficiencies and give you more time to focus on your clients. 

How to prepare your practice and clients for basis period reform

With basis period reform and the first stage of MTD for ITSA coming into place at a similar time, accountants and bookkeepers could be juggling estimated figures and migrating clients to MTD software all at once.

Here are a few steps you can take to prepare for the tax year basis:

1. Get your practice up to speed

Make sure your team feels confident talking about basis period reform with clients. Identify which clients will be affected by the measure, so you can figure out who needs support. As a reminder: sole traders and partnerships that already align their accounting with the tax year won’t be affected.

2. Provide targeted support

Start having conversations with clients today about basis period reform. Every client’s basis period for the transitional year could be different, depending on their accounting year end. Tailoring your support to individual clients will be the best approach, so take things on a case-by-case basis.

Clients might also have industry-specific questions. For example, farming or creative artist clients will want to know if basis period reform affects averaging rules.

3. Reassure your clients

A longer basis period for the transitional year might be worrying for your clients. Reassure them that they can spread this bill over five years and keep cash flow on track. Make sure they know this is a one-off transitional period, and they’ll only need to include 12 months of tax year profits on their returns going forward.

It’s estimated that only 7% of sole traders will be affected by basis period reform – though 33% of partnerships and LLPs will feel the impact. Make sure your clients know they don’t have to change their accounting date if there’s a genuine commercial reason for them having a different year-end.

HMRC will reach out to clients who have a non-tax year accounting date. But don’t wait until your clients are contacted – start preparing them for basis period reform today.

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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