What is Basis Period Reform?
Basis Period Reform ONLY affects sole traders and partnerships that have a year end other than 31st March-5th April.
If this does not apply to you then these changes will not apply to you either.
- Introduction
Basis Period Reform was introduced by HMRC when they were originally going to bring Making Tax Digital to sole traders.
However, although they have postponed the MTD requirements, they have not postponed the Basis Period Reform requirements.
Basically, HMRC are aligning the fiscal year end for all who are self employed to the 31st March/5th April, as it will be necessary when they do eventually bring MTD in.
- What The Means
For example, businesses that have a 31st July year end, you would normally declare the year ended 31st July 2023 figures on the self assessment return for 2023/24.
However, for the 23/24 return, you will also need to declare the period to the end of the tax year, ie 1st August 2023 to 5th April 2024.
This effectively means that you are declaring income in excess of one year and if your year end was 30th April then the period you are declaring is 23 months.
This will obviously impact the amount of tax due quite considerably.
- Mitigating Factors
There are 2 main mitigating factors against this additional period:
- Overlap relief: This was declared the first year of trading and can (in theory!) be ascertained from the HMRC portal. This amount will be deducted from the long period of account. However, it’s worth bearing in mind that this would have been rather a long time ago and also would have been when the business was starting up so is unlikely to be enough to offset the additional period of account; and
- Time to pay: HMRC are giving tax payers that are affected by this up to 5 years to pay the additional tax that arises on the longer period of account.
- Conclusion
This change is going to have some significant impact on self employed people that are affected. If you or anybody you know is affected by these changes then do talk to your accountant.