Basis Period Reform – What is the latest?

We are all breathing a sigh of relief that Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) has been delayed for a further 2 years until 6 April 2026 and the income thresholds have been increased meaning that many taxpayers will no longer need to participate, for the foreseeable future.  

However, the less widely discussed ‘Basis Period Reform’ intended to streamline MTD ITSA is still set to go ahead, as planned. 

Basis Period Reform requires all unincorporated businesses to report profits on a tax-year basis from April 2024. While the vast majority already do this, the old system, known as the ‘Current Year Basis’, allowed businesses to report in line with accounting periods, even where this doesn’t align with the tax year. 

For those with accounting periods that don’t align with the tax year, there are two options: 

• Change your accounting date to align with the end of the tax year; or 
• Apportion profits for the two accounting periods that straddle 5 April. 

For 2023/24 (i.e. the transition year), profits must be reported up to 5 April 2024. This could mean that more than 12 months of profit might be taxed in 2023/24 resulting in more Income Tax and National Insurance becoming payable. However, the amount taxed might be reduced by ‘overlap relief’.

If your accounting period does not end on 31 March (or 5 April), you may have been taxed on some of your profits twice in the early years of your business (or in a subsequent year if you changed your accounting date). These ‘overlap profits’ will be deductible from the extra profit taxed in 2023/24 by Basis Period Reform. However, your taxable profit in 2023/34 may still be substantially higher – even after deducting overlap relief.  

This additional profit will be automatically spread over 5 years from 2023/24 onwards.  While this is a welcome relief, it will probably still result in more tax to pay sooner and potentially at higher tax rates following the chancellor’s decision, last November, to freeze the personal allowance and income tax bands for the next five years. 

Those affected by Basis Period Reform should consider whether to align their accounting period sooner than 5 April 2024 to avoid having to apportion profits (and potentially including estimates which will require additional work and fees) to complete their Tax Returns – if it’s commercially viable for your business.  

If you would like to discuss how Basis Period Reform might affect you and your business, please call us at 01223 810100.