Basis Period Reform – it’s time to get ready for implementation
As the changes take effect, Chris Campbell provides an update on Basis Period Reform and its impact on unincorporated businesses.
Now that we are in the new tax year, tax practitioners will need to further consider the impact of Basis Period Reform on their clients.
What is changing for the 2023/24 tax year?
Although the mandation of Making Tax Digital for Income Tax Self Assessment (MTD ITSA) has been delayed, Basis Period Reform will continue as originally planned. For unincorporated businesses which do not have a 31 March or 5 April accounting year end, this means that the established rule for the taxation of trading income, called ‘current year basis’, will be replaced with a new ‘tax year basis’ going forward. The change will take effect from the 2024/25 tax year, with 2023/24 being a transitional year.
The ‘current year basis’ means taxable profits for a tax year are normally based on the accounting period ending in a tax year. Thus, accounting profits for the year ended 30 September 2022 were taxable in the 2022/23 tax year.
With the proposed changes, tax would instead be payable based on the profits of the tax year: the ‘tax year basis’. This means that an apportionment will be needed going forward where the year end is not 31 March or 5 April.
Accountants and tax practitioners will have to consider whether to change their client’s year end to 31 March or 5 April to avoid the apportionment, or continue with the existing year end. There are advantages to both options: if all clients have a 31 March or 5 April year end this may avoid the apportionment caused by Basis Period Reform, whereas it would make it more challenging for accounting practices to spread their workload throughout the year if their unincorporated business clients all have the same year end.
In the tax year of transition (2023/24), the standard profits plus the profits up to 5 April 2024 will be taxed. It is of course possible to claim Overlap Relief in respect of profits taxed twice, either when the business commenced or when self-assessment commenced in 1996/97 (whichever is relevant).
Spreading where Basis Period Reform significantly increases profits
Under Basis Period Reform, it is possible to elect for the transitional profits to be spread over five tax years. The legislation is contained within Section 72 Schedule 1 FA 2022.
It is important to remember that the option to spread over five years relief is only available in respect of transitional profits in the 2023/24 tax year. It is not possible for the standard profits of the 2023/24 tax year to be spread over the five year period.
ICAS had argued for a longer spreading period to reduce the risk of an increased marginal Income Tax rate (especially where overlap profits are significantly lower than the transitional profits), however the legislation was finalised on the basis of five years spreading.
Where transitional profits are being spread, instead of all being payable in 2023/24, 20% of transition profits is chargeable to Income Tax under Chapter 2, Part 2 ITTOIA 2005 over five tax years, starting 2023/24.
It is possible to accelerate the taxation of the spreading adjustment under Section 73 Schedule 1 FA 2022. Where an election is made, transitional profits taxed in later years reduced by formula A x (5 / T). A is the additional amount of the transition profits treated as arising in the tax year for which the election is made, and T is number of tax years remaining in spreading period.
If a taxpayer elects to have the profits spread over five tax years but ceases trading before that time has elapsed, the balance of transitional profits chargeable for the tax year in which the trader permanently ceases.
In the case of farmers and creative artists, transition profits under Basis Period Reform should not be taken into account in averaging of profits.
Impact of Basis Period Reform on income thresholds for pension annual allowance and High Income Child Benefit Charge
Schedule 1 Finance Act 2022 paragraph 75 considers this exact scenario. By treating the tax of the transitional profits separately in the way outlined in the legislation, this should mean that restrictions for the pension annual allowance and High Income Child Benefit Charge (HICBC) should not apply as the result of the incorporation of transitional profits. Businesses affected by pension annual allowance restrictions or HICBC based on their standard profits in 2023/24 will continue to do so.
Notwithstanding the above, the Income Tax Personal Allowance should still however be restricted if the transitional profits cause a taxpayer's taxable income to exceed £100,000.
After consulting with the professional bodies and other stakeholders, HMRC has announced a change in the treatment of provisional figures in tax returns. The time limit for amending provisional figures will be changed to the normal time limits for making amendments to self-assessment tax returns. This will mean that businesses can amend provisional figures when they are preparing the tax return for the following period, something that will be appreciated by both businesses and tax practitioners alike.
HMRC had advised that it would be updating its guidance before the start of the 2023/24 tax year, and we await further developments on this.
To assist agents and taxpayers, HMRC is expected to be able to provide either the overlap profits figure from a previous tax return or the profit figures to enable an agent to calculate the overlap profit.
ICAS is currently working with HMRC regarding an online form for submitting overlap relief requests, to provide an easier way to submit requests and to ensure that these are dealt with separately from general post. This is expected to be launched nearer the summer.
It is nevertheless important to bear in mind that this will only be as good as the information in HMRC systems. So, for example, if the information was not recorded correctly by a previous agent, this could affect the information that HMRC can provide.
HMRC has advised that the following information will be needed for the online form to request overlap profits information:
- taxpayer name
- National insurance number or tax UTR
- name or description of business
- whether this business is self-employment or part of a partnership
- if the business is part of a partnership, the partnership’s UTR
- date of commencement of the self-employment business, or date of commencement as a partner in partnership (if not known, then the tax year of commencement)
- the most recent period of account or basis period the business used
Let us know your views
We welcome members’ input to inform our work on consultations or other tax-related matters – email email@example.com to share your insights and feedback. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by members.