Income tax basis period reform will change the way profits from businesses run by self-employed individuals, partnerships, trusts and estates will be taxed in 2023/24 if they use an accounting date other than 31 March or 5 April.

What is changing?

At present the existing basis period rules assess you on the ‘current-year’ basis which means a tax year will include the results of an accounting period which ends in that tax year. For example, if your accounting year end date is 30 November 2022 the profits for this year will be included in your 2022/23 tax year and the profits for the period from 1 December 2022 to 5 April 2023 will be part of your profits declared for the tax year 2023/24. The new changes mean that HMRC will be taxing businesses on the profits of the tax year regardless of your accounting year end date

The new rules will first apply from 5 April 2024.

2023/24 tax year will be the transitional year between the existing rules and the new rules and will mean that your 2023/24 tax return will include your twelve months existing accounting period plus the balancing months up to 31st March 2024. As more than twelve months would be assessed to income tax within the tax year, you have the opportunity to claim any overlap relief and possibly spread any additional income tax over a number of years.

Impact of new changes

The reforms do not require businesses to change their accounting dates to match the tax year. However, if they are not changed, businesses will have to apportion profits each year to arrive at the profits figure taxable in the year and might have to file provisional returns until accurate information is available. Businesses may therefore decide to change

their accounting year-end date to 31st March or 5th April in order to align with the new rules to simplify their reporting and avoid additional compliance burden and cost in the future.

How can Meston Reid & Co help?

Meston Reid & Co can help guide you through the changes to help you understand the implications to your tax position. We can demonstrate how the transitional year could impact you and help you understand how the transitional year’s profits will be assessed. We can also help you in the decision making process as to whether it would be beneficial, or not, to change your accounting year end date to either 31 March or 5 April.

To assess the impact on you please contact Adrian Johnston, Tax Manager (johnstona@mestonreid.com) or speak with your usual Meston Reid & Co contact.