As a trusted provider of cloud accounting services, we at The Numbersmith understand the importance of staying informed about changes in tax regulations. One significant change that affects many of our clients is the new rules for reporting income from self-employment and partnerships, known as basis period reform. In this blog post, we'll dive into the details of these changes and how they might impact your business, providing you with the information and guidance you need to navigate this transition with confidence.
What are the Changes to Reporting Income from Self-Employment and Partnerships?
Basis period reform is a set of new rules that change how self-employed individuals and partnerships report their taxable profits on their self-assessment tax returns. Starting from the 2023/24 tax year, your taxable profit will be based on the income earned during the tax year itself (6 April to 5 April), regardless of your accounting period.
This means that unincorporated businesses will no longer be able to use their chosen accounting period end date when calculating their taxable income. Instead, they will need to apportion profits based on the tax year, which may require additional calculations and adjustments.
Why is This Change Happening?
The goal of basis period reform is to simplify the way businesses report their income and pay taxes. Under the old basis period rules, businesses could have different accounting periods, which could lead to confusion and complexity when calculating taxable profits.
This was particularly true for businesses with accounting year-ends that differed from the tax year, as they would need to apportion their profits and make adjustments to determine their tax liability.
By aligning the reporting of income with the tax year basis, the new rules aim to make the process more straightforward and reduce the administrative burden on businesses. It also brings the UK's tax system more in line with other countries, where taxable income is typically based on the tax year rather than individual accounting periods.
How Will This Affect My Business?
The impact of basis period reform on your business will depend on your current accounting year-end date. If your business's accounting period ends between 31 March and 5 April (inclusive), you likely won't see much change, as your accounting year is already aligned with the tax year.
However, if your accounting period ends on a different date, you'll need to make some adjustments when reporting your income. This is because you'll now need to calculate your taxable profit based on the income earned during the particular tax year rather than your accounting period.
For example, let's say your business's accounting year ends on 31 December. Under the new rules, you'll need to apportion your profits from two different accounting periods to determine your total taxable profits for the 2023/24 tax year.
This means you'll take the profits generated from 1 January 2023 to 5 April 2023 (from your 2023 accounts) and the business profits from 6 April 2023 to 31 December 2023 (from your 2024 accounts) to calculate your overall profit for the 2023/24 tax year.
This process of apportioning profits may require additional record-keeping and calculations, particularly in the transitional year (2023/24). It's essential to work closely with your accountant to ensure that your taxable profits are calculated accurately and that you're claiming all the allowable expenses and reliefs you're entitled to.
What About Overlap Relief?
Under the old basis period rules, some businesses may have paid tax on the same profits twice, resulting in what's known as overlap profits. This could occur when a business changed its accounting period or when a new sole trader or partnership started trading.
If you have overlap profits, you'll be able to claim overlap relief in the 2023/24 tax year to reduce your taxable profit. This is a one-time opportunity to use any accumulated overlap relief figure, and it's crucial to claim this relief, as any unused overlap relief will be lost after this tax year.
To claim overlap relief, you'll need to know the amount of overlap profits you have. This information should be available on your previous tax returns or your business records, such as the self-employment supplementary pages (SA103S or SA103F) of your self-assessment tax return.
If you're unsure about your overlap relief figure, consult your accountant, who can help you determine the correct amount and ensure that it's claimed properly on your tax return.
Transitional Rules for the 2023/24 Tax Year
To help businesses adjust to the new rules, there are special transitional rules in place for the 2023/24 tax year. This is because some businesses may find that they have more than 12 months' worth of profits to report in this transitional year due to the change in reporting periods.
Under the transitional rules, if your business has additional profits to report in the 2023/24 tax year (known as 'transition profits' or 'transitional profit'), you'll be able to spread these profits over five tax years (from 2023/24 to the 2027/28 tax year). This spreading of profits is designed to help manage your tax liability and avoid a significant one-off increase in your income tax and National Insurance contributions.
It's important to note that the transitional rules are optional, and you can choose to pay tax on all your transitional profit in the 2023/24 tax year if you prefer. However, for most businesses, spreading the profits over five tax years will be the most beneficial option, as it helps to smooth out your tax liability and maintain cash flow.
What Actions Should I Take?
As a business owner, it's essential to understand how basis period reform will affect your specific circumstances. We recommend reviewing your business accounts and speaking with your accountant to determine any changes you need to make when preparing your self-assessment tax return.
If your accounting period end doesn't currently align with the tax year, consider changing it to simplify your reporting under the new rules. While you're not obliged to change your accounting year-end date, aligning it with the tax year (5 April) can make the transition to the new rules smoother and reduce the need for apportioning profits in future tax years.
You should also start gathering the necessary information to calculate your taxable profits for the 2023/24 tax year, including details of your business income, allowable expenses, and any overlap relief you may be entitled to. Make sure to keep accurate records of all your business transactions, as this will make it easier to prepare accounts and complete your tax return under the new rules.
If you're unsure about any aspect of the new rules or how they apply to your business, don't hesitate to seek professional advice from your accountant or consult the detailed guidance provided by HMRC.
How The Numbersmith Can Help?
At The Numbersmith, we're here to support you through these changes. As a platinum partner to both Xero and QuickBooks, we have the expertise and technology to ensure your business accounts are accurate, compliant, and optimised for the new rules.
Our team will work closely with you to understand your unique needs and provide the guidance you need to navigate basis period reform with confidence.
We can help you review your current accounting period, determine any adjustments needed for the transitional year, and claim any overlap relief you're entitled to. We'll also work with you to develop a long-term strategy for your business accounts, ensuring that you're well-positioned to meet your tax obligations and achieve your financial goals.
If you have any questions about the changes to reporting income from self-employment and partnerships, please don't hesitate to get in touch. We're always happy to listen and offer our insights to help your business thrive.
Conclusion
Basis period reform represents a significant shift in how self-employed individuals and partnerships report their income and pay taxes. While the new rules may seem complex at first, with the right guidance and support, you can navigate this transition smoothly and ensure that your business remains compliant and profitable.
By understanding the key aspects of basis period reform, such as aligning taxable profits with the tax year, using overlap relief, and the transitional rules for the 2023/24 tax year, you'll be well-equipped to make informed decisions about your business accounts and tax planning.
At The Numbersmith, we're committed to helping our clients succeed in this new landscape. Our expert team, combined with our cutting-edge cloud accounting technology, ensures that you have the tools and insights you need to make your business the best it can be.
So, if you're looking for a trusted partner to guide you through the complexities of basis period reform and beyond, look no further than The Numbersmith. We're here to listen to your story, understand your individual circumstances, and provide the tailored advice and support you need to thrive in today's ever-changing business world.
FAQs
What is the basis period for reform, and how does it affect my business?
Basis period reform is a set of new rules that change how self-employed individuals and partnerships report their taxable profits. Starting from the 2023/24 tax year, your taxable profit will be based on the income earned during the tax year itself (6 April to 5 April), regardless of your accounting period. This means you may need to apportion profits and make adjustments when calculating your taxable income.
What should I do if I have overlap relief?
If you have overlap profits from previous years, you can claim overlap relief in the 2023/24 tax year to reduce your taxable profit. This is a one-time opportunity, and any unused overlap relief will be lost after this tax year. Consult your accountant to determine the correct overlap relief figure and ensure it's claimed properly on your tax return.
How can The Numbersmith help me navigate basis period reform?
As a platinum partner to both Xero and QuickBooks, The Numbersmith has the expertise and technology to ensure your business accounts are accurate, compliant, and optimised for the new rules. They can help you review your current accounting period, determine necessary adjustments for the transitional year, claim overlap relief, and develop a long-term strategy for your business accounts.