Brought to you by
Bright full colour logo
Bright was created in 2021 when Thesaurus Software Ltd. and Relate Software Ltd. decided to join...
Save content
Have you found this content useful? Use the button above to save it to your profile.

Basis period rules change for the 2024/25 tax year

19th Dec 2023
Brought to you by
Bright full colour logo
Bright was created in 2021 when Thesaurus Software Ltd. and Relate Software Ltd. decided to join...
Save content
Have you found this content useful? Use the button above to save it to your profile.

Basis period rules are changing soon. The sun is setting on current year basis at the end of the 2023/24 tax year, and rising with a tax year basis from the start of the 2024/25 tax year. 

Traditionally, business profits have been taxed on a current year basis, where profits were calculated based on a business’ accounting year. However, this can create overlapping periods, which generates overlap relief (a tax deduction that accounts for profits taxed twice) that can sometimes be a complicated process to calculate. 

From the 6th of April 2024, this current year basis will be scrapped, and businesses will be taxed on profits they made for the tax year instead. This means that from the start of the 2024/25 tax year onwards, your clients’ profits will be calculated and taxed on a tax year basis. 

One of the main goals of this reform is to align tax liability with actual income earned in a tax year, and to hopefully cut down on mismatches and streamline reporting to HMRC. However, clients with an accounting period that’s not aligned to the tax year (i.e. between the 6th of April and the 30th of March) may face some initial challenges. 

Also, it’s important to note that if a clients’ accounting date is between the 31st of March and the 5th of April, that this change does not apply to them. They’ll still be assessed on their profits for the tax year ending in their accounting period, as before. 

What changes will my business and clients face from basis period reform? 

If a client’s accounting date is between the 6th of April and the 30th of March, it's likely that they’ve paid taxes twice on some of their profits. With the recent changes to overlap relief, this means that they may be entitled to use the initiative to get this tax back, which was previously only allowed to take place either when the business stops trading or when they change their accounting date. 

HMRC has eased restrictions on overlap relief. There will be a transition period until the 5th of April 2024, to allow any overlap relief that businesses may be due to be used against their profits for that tax year. This means that businesses that have any accounting period with unused overlap relief, can use it by this date. 

Another important point to consider is that some of your clients may want to change their accounting period to align it with the end of the tax year. To do this, they’ll need to complete box 11 on the self-employment page (SA103F) page of their tax return.  And while this can be a bit tedious initially, as an accountant, the change should hopefully cut down on some annoying admin work, as your clients will no longer need to apportion their profits on their tax returns every year.  

How does a business find out it’s due overlap relief? 

HMRC has released a form that businesses can use to submit requests for details about overlap relief. So, if your clients think that they may be entitled to overlap relief, this form will help them know for sure. 

HMRC will need some details about their business to be able to find the correct figures, including name, NI or UTR number, name/description of your business, whether it’s a sole trader or part of a partnership, commencement date of the business, and the most recent period end date that was used to report its profit or loss. Please note that overlap relief information can only be provided if it was recorded in HMRC’s system. 

For further information on basis period reform and overlap relief, please visit gov.uk's website

Here at Bright, we’re working hard behind the scenes to provide you with the most up-to-date information on the latest news and changes within the industry. If you’d like to find out for about our multi-award-winning software, just book a demo of any products you like in the link below. 

Book a demo

eleanor vaughey

 

 

Written by Eleanor Vaughey | Bright