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March 27th 2024

Our thoughts on the basis period reform

The basis period reform aims to simplify the tax reporting process by aligning the taxation of business profits more closely with the tax year itself.

To help you navigate the transition, we wanted to explore the essence of basis periods and the forthcoming changes in a quick article.

Basis periods, under the current tax system, dictate that unincorporated businesses (sole traders and partnerships) are taxed on profits earned during an accounting period ending in the tax year.

This method, while offering flexibility, often complicates tax calculations, especially for businesses that change accounting dates, start new ventures, or discontinue operations.

The introduction of the tax year basis means profits will now be taxed in the year they are earned, eliminating the need for complex apportionments and adjustments associated with overlap relief.

The transition aims to ease tax planning, improve compliance, and potentially aid cash flow management by reducing the gap between earning profits and paying taxes on them.

For businesses whose accounting periods do not currently align with the tax year (6 April to 5 April), the 2023/24 tax year should have served as a crucial transitional period.

During this time, you will need to calculate tax based on both 'standard part' profits and 'transitional part' profits.

This adjustment could temporarily increase your tax liabilities, prompting the need for strategic planning and potentially re-evaluating your accounting dates to mitigate impacts and align more closely with the new requirements.

To alleviate potential burdens, the Government proposes allowing businesses to spread any excess profits arising from the transition over five years.

Furthermore, the reform aims to streamline tax reporting by fully utilising any accumulated overlap relief during the transitional year, thereby simplifying future tax calculations, and reducing administrative tasks.

Obviously, the impending changes should underscore the importance of proactive planning and adaptation on your part.

We’re encouraging our clients to review their accounting practices, evaluate the potential impact of the transition on cash flows and tax liabilities, and consider the benefits of aligning accounting dates with the tax year.

Additionally, staying informed of administrative adjustments suggested by HMRC, such as amendments to provisional figures and potential extensions of filing deadlines, will be crucial for ensuring compliance and optimising your tax position during and after the transition.

To make sure your business stays compliant with the current regulatory and legislative requirements, it’s always best to speak to a qualified and experienced accountant.

We can also help you mitigate potential tax liabilities and reduce your overall expenses through effective tax planning.

Please reach out if you have any questions or require additional information via email: enquiries@scholesca.co.uk or call your nearest Scholes CA branch.


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