Save content
Have you found this content useful? Use the button above to save it to your profile.
April on a calendar | AccountingWEB | Basis period reform The range of repercussions
istock_calendar_phototechno

Basis period reform: The range of repercussions

by

Basis period reform affects a surprising range of tax and non-tax issues. ATT technical officer Emma Rawson looks at some of these interactions, and what they might mean for taxpayers.

26th Apr 2024
Save content
Have you found this content useful? Use the button above to save it to your profile.

Basis period reform is a fundamental change in how the trading profits of unincorporated businesses - such as sole traders and members of partnerships - are calculated for tax purposes.

From 6 April 2024, a new ‘tax year basis’ of assessment applies, with businesses taxed on the profits arising in each tax year regardless of their accounting period end date.

Tax year 2023/24 was a transitional one, in which we switched over from the current year basis of assessment to this new tax year basis. Specific rules apply in the transitional period, which may result in additional ‘transition profits’ being brought into account.

This change will mean extra tax admin for those businesses who don’t draw accounts up to 31 March or 5 April, as well as a possible temporary increase in their tax bills. However, the tendrils of basis period reform go far beyond this, and interact in sometimes surprising ways with other aspects of the tax and benefits system.  

The transition profit hokey cokey

Under the transitional rules, any extra transition profits brought into account due to basis period reform are excluded from net income when carrying out the income tax calculation for the year.

Register for free to continue reading

It’s 100% free and provides unlimited access to the latest accounting news, advice and insight every day. As well as access to this exclusive article, you can:


Content lock down, tick icon

View all AccountingWEB content


Content lock down, tick icon

Comment on articles


Content lock down, tick icon

Watch our digital shows and more

Access content now

Already have an account?

Replies (29)

Please login or register to join the discussion.

avatar
By FactChecker
26th Apr 2024 18:53

Thanks (I think)!

And this is just the FIRST of the many benefits that we've been promised will come our way courtesy of the munificent MTD.
Can anyone remind me who actually gets ANY benefit from all this?
Or how it aligns with HMRC's supposed commitment (made in order to be allowed to put the OTS to sleep) to 'simplifying tax' being a core priority.

Thanks (20)
avatar
By PAULLEWISFCCA
29th Apr 2024 10:12

requested a number of overlap profit details from HMRC - first one sent in October - so far no response

Thanks (0)
Replying to PAULLEWISFCCA:
avatar
By naodo
29th Apr 2024 10:35

If your client has been in business for many years, you may find that HMRC don't have the records anymore. I spoke to HMRC about this for 2 clients. Both times I was told that their computer system only goes back to 1997 when SA was introduced. Anything before that was lost. They even called in a 'technical inspector' to look at it, and the only info they have is the box on the 1997 TR for 'overlap profits brought forward'. If this box was blank, they don't have a record. This was a problem for us as on one of the clients as he had started trading in 1981! Unbeliveable that HMRC has destroyed all records pre 1997. Are they not going to check people's claim to overlap relief against their own records? People could claim anything - they have no way to disprove it!

Thanks (3)
Replying to naodo:
By jon_griffey
29th Apr 2024 11:38

But surely you don't need to go back before 1996/97 as that was when overlap relief was introduced. Before then it was PY basis and overlap didn't exist. You should just need the 2017/18 return to establish what the transitional overlap relief was.

Thanks (2)
Replying to jon_griffey:
avatar
By rmillaree
29th Apr 2024 12:16

Before then it was PY basis and overlap didn't exist. You should just need the 2017/18 return to establish what the transitional overlap relief was.

have you lost a decade here jon ?

Thanks (1)
Replying to rmillaree:
By jon_griffey
30th Apr 2024 09:01

Well spotted. I meant 1997/98. Sausage fingers.

Thanks (0)
Replying to naodo:
avatar
By rmceleney
29th Apr 2024 14:22

The only time that pre-1996/97 returns would be relevant is where the trade commenced post-5 April 1994. Anyone starting earlier is subject to transitional overlap relief, which will normally be based on the profits reported on the 1997/98 tax return (before deduction of capital allowances). If HMRC can see the profits for the accounting period ending in that year, it should be possible to reconstruct.

Thanks (1)
Replying to rmceleney:
avatar
By naodo
30th Apr 2024 13:15

Thanks to everyone who has corrected me on this thread; since posting I have been in discussion with my tax partner, and she has explained my error. I am lucky enough to be too young to have done any tax returns in the 1980s/1990s so I wasn't aware that there had been a change to basis periods way back then. What is puzzling me though, is, why didn't HMRC tell me this when I called them? HMRC can see everything since 1997 on their computer so they could have given me the AP profit for 97/98 tax year. Maybe they are too young to know as well??

Thanks (0)
Replying to naodo:
avatar
By rmillaree
30th Apr 2024 13:38

"What is puzzling me though, is, why didn't HMRC tell me this when I called them?"

with hmrc unles you ask them the correct specific question needed they are very unlikely to point out something useful that you havent specifically asked about - howveer relevant that may be to the poujnt in hand. Or perhaps you got a poor advisor - or as you say too young

Thanks (1)
Replying to PAULLEWISFCCA:
avatar
By Marlinman
29th Apr 2024 11:04

Likewise, no response yet and clients waiting to know where they stand.

Thanks (1)
avatar
By rmillaree
29th Apr 2024 10:59

what is sadly lacking here from all relevant parties is 2 worked examples as to how figures flow through to the tax return - specifically with regard to the tax return completion when acounting peroods change.

I have still seen no sensible details posted of how the tax rteurn boxes are completed where there is long period and its sad that the aaat and ICAEW etc have not given any worked examples or demanded of hmrc that they give a worked example as to how figures flow through tt tax return.

I have tried to make sense of hmrc notes to tax return and it seems to me that no one is advising how tyhe taxc rteurn entries aer completed for simple worked example where the transitional period needs to be adjusted in and out.

Thanks (3)
Replying to rmillaree:
avatar
By Adam_H
29th Apr 2024 11:30

I'd let my software do it, but I use IRIS and apparently they didn't know you could spread profits if you changed to a 31 March year end in the transition year :-/

Thanks (2)
Replying to Adam_H:
Emma Rawson
By Emma Rawson
29th Apr 2024 11:56

We're aware that some software houses have incorrectly said you can't spread where you change year-end, and I'm following up with HMRC on this point.

I will also look (time permitting) to do another article on what happens with a change of accounting date in 23/24

Thanks (3)
Replying to Emma Rawson:
Morph
By kevinringer
03rd May 2024 15:21

Emma, our software (PTP, which is part of Iris) is faulty; it won't let users complete a Partnership Full schedule if the only income is trading income, even if the accounting period is not 31 March/5 April. I have reported this to PTP and they're silent about how and when they're going to fix it. The software industry has been working on 2024 Tax Returns for some time. If the software industry has failed to understand BPR correctly, what hope is there for Joe Public? This demonstrates how poorly HMRC has communicated BPR to "stakeholders".

Thanks (0)
Replying to Adam_H:
avatar
By rmillaree
29th Apr 2024 12:11

"I'd let my software do it, but I use IRIS and apparently they didn't know you could spread profits if you changed to a 31 March year end in the transition year"

Imho thats a poor indictment of acountancy standards in the profession - if we cant follow notes and work out the answers - or at least try to. Without having had the time to go through the entire working calculations notes or chase hmrc myself - i have tried to do the calcs and run into the same issues as iris in that it does not apear that the guidance advises which boxes should be completed in which manner - so i am siding with iris here that we need a simple worked example approved by hmrc and the accounting bodies ref entering known figures in the tax return boxes - to be here its as simple a question as asking which box do i put calculate transitional period adjustment in to reduce full period profits down to 12 months.
Note someone also said the boxes where not there on hmrc online either when using hmrc software - i aint fact checked if that is true i must admit - i might have a look when i get time as teh specific notes in hmrc sioftware miught clarify the answer.

Thanks (1)
Replying to rmillaree:
avatar
By Adam_H
29th Apr 2024 16:29

Mine was a somewhat tongue in cheek comment...

Upon learning that IRIS wasn't working as I'd anticipated, I started to read through the tax return notes (starting with the partnership full pages) which, quickly confirmed that IRIS were incorrect and, seemed fairly straightforward to follow to determine the correct entries for boxes 16.1 to 16.4 (equivalent to 73.1 to 73.4 of the self employment pages).

If you can't follow instructions without a worked example, well...

Thanks (0)
Replying to Adam_H:
avatar
By rmillaree
29th Apr 2024 17:01

seemed fairly straightforward to follow to determine the correct entries for boxes 16.1 to 16.4 (equivalent to 73.1 to 73.4 of the self employment pages).

"If you can't follow instructions without a worked example, well..."

my problem is nothing to do with boxes 73.1 onwards -, those boxes are a walk in the park ! - my problem is that i have started out with profits for the acounting period when progressing towards completing box 64. However i know that the transitional element of the profits needs to be removed before we get to box 73 thats reasonably clear - i just dont know how to do that removal !

I can't see that is says adjust profits in box 64 to remove profit of transitional period - box 68 could be a candidate perhaps but the notes specificlaly says Do not include any transition profit or loss in this box.

I have two people that have commented on this issue one has said they have adjusted figures so that box 64 does not contain the transitional peirod profit element - the other person have said they would adjust in box 68. its reasonably clear both probbaly work but would be nice if i was following soem specific formal guidance.

note the answer may very will be there and i may very well be slow on the update - so if anyone does have answer to that question that would be appreciated even if its just pointing out my stupidity at not being able to get the 12 month period of the longer period only in box 73

Thanks (0)
Replying to rmillaree:
avatar
By Ardeninian
30th Apr 2024 10:41

rmillaree wrote:

my problem is that i have started out with profits for the acounting period when progressing towards completing box 64. However i know that the transitional element of the profits needs to be removed before we get to box 73 thats reasonably clear - i just dont know how to do that removal !

I can't see that is says adjust profits in box 64 to remove profit of transitional period - box 68 could be a candidate perhaps but the notes specificlaly says Do not include any transition profit or loss in this box.


As I have replied to you elsewhere, you should use box 68 to adjust your profits for your accounting period in box 64 to the profits for your standard part.

If you're still not sure, have a look at HS222 working sheet 3, page 5 (https://assets.publishing.service.gov.uk/media/6617f3022b2963dfa2d1ea9d/...). Box U is your standard profit, box W is your accounting period profit from box 64, box X is your adjustment which goes in box 68.

Thanks (0)
Replying to Ardeninian:
avatar
By rmillaree
30th Apr 2024 11:42

Thanks for that Ardeninian - as you have suggested i have followed the calcs and i agree that box 68 is the correct place to put this adjustment - all sorted now thanks again.

Note what was confusing me was the following notes with regard to box 68 - the notes specifically say.

"Do not include any transition profit or loss in this box."

Bearing in mind the figure i am including here is the transitional profit - albeit i am including the total as a negative value hopefully you can see why the confusion arose.

Its a shame my tax experts and btc hadnt been able to see the woods for the trees either. my fault for not taking the time to through the detailed working sheet - can i blame hmrc for having misleading notes ?

for anyone who has been adjusting box 64 down to pro rata rather than using box 68 i would say adjusting the box 68 is the clearly way to go.

as this issue is sorted my puzzlement at how and why IRIS cant get this right is growing . their ability to go weeks into tax year without working product is warning to all

Thanks (0)
avatar
By rmceleney
29th Apr 2024 11:06

The exclusion of transition profits from net income can also affect the rate of annual allowance charges, as s227 FA 2004 looks at reduced net income (net income less PA), which won't include transition profits.

One point to watch is that it might not be the whole of the transition profits that are excluded for this purpose. It's the amount net of any applicable Step 2 reliefs that is excluded. For partners it will be common to have to deduct their partnership capital loan interest to determine how much is excluded.

Thanks (1)
By Nebs
29th Apr 2024 11:41

When overlap profits and relief was introduced no allowance for indexation was given on the grounds that taxpayers could claim the relief whenever it suited them. As that option has now been removed, and people are forced to use their overlap profits this year, there should be an indexation allowance to balance the change.

Thanks (2)
Replying to Nebs:
avatar
By rmillaree
29th Apr 2024 12:18

if people had put the tax saving from delaying the tax payable into an interest earning acount that would have been compensation for inflationery issues.

Thanks (0)
Replying to rmillaree:
avatar
By Trethi Teg
29th Apr 2024 15:22

I suspect that you havent run a business desperate for cash flow.

Thanks (1)
Replying to Trethi Teg:
avatar
By rmillaree
29th Apr 2024 15:44

every buisness needs to plan for cashflow - facts are by the time any payment of tax is due the business will normally have made the profits and had the benefit of those profits.

Yes it can be tough paying tax if you need to invest in assets stock etc - but the reality is hmrc normally provide terms that are more generous that the commercial entities people in business deal with its not their issue or problem to finance the working capital arranegements needed - thats up to the business owner end of.

Note if you are struggling with specific one of tax increases hmrc are normally very helpful here ref providing paymenty plans if that is necessary.

Thanks (0)
Replying to rmillaree:
avatar
By Trethi Teg
30th Apr 2024 09:01

Are we talking about the same HMRC?

HMRC do not "provide terms that are more generous" - they are a tax gathering service financd by tax payers. Their quoted objectives have changed from collecting the "right" amount of tax to collecting the "maximum" amount of tax.

HMRC employees have never risked anything let alone put their houses on the line etc etc to create work and opportunities and to generate the taxes which pay their salaries.

With regard to being very helpful in providing payment plans my experience is they simply lie to unsuspecting taxpayers about the period and terms of payment plans that are available. If one looks at the HMRC Manuals on time to pay one will see that terms of up to 1 year, up to 2 years and so on are available. However, taxpayers are told that there is a maximum of 3 months or 6 months etc etc.

I think the main problem I had with your original post was the perception that you were on HMRC's side rather than your clients. If your clients get that impression they wont be clients for very long.

Thanks (0)
Replying to Trethi Teg:
avatar
By rmillaree
30th Apr 2024 10:28

there is probably little point carrying on this discussion if you have such a biased viewpoint of hmrc.

Facts of the matter are

ref sa tax
balance of tax due is paid 9 months after end of acounting period
first payment on account approximateing 50% of tax is paid 10 months into the year
second payment on account of tax is paid 4 months after tax year end

so its factually correct these terms are more generrous than suppliers who will want paying after 60 days tops.

"With regard to being very helpful in providing payment plans my experience is they simply lie to unsuspecting taxpayers about the period and terms of payment plans that are available. If one looks at the HMRC Manuals on time to pay one will see that terms of up to 1 year, up to 2 years and so on are available. However, taxpayers are told that there is a maximum of 3 months or 6 months etc etc."

hmrc are not perfect agreed - in my experience people who make reasonable request will normally be accomodated - generally speaking though they are EXPECTING you will normally paid on time or asap.

"I think the main problem I had with your original post was the perception that you were on HMRC's side rather than your clients."

Nothing could be further from the truth i am simply living in the real world here - i will always go out of my way to assist clients with time to pay so your presumption here could not be further from the truth. the thing is with the internet its soooo easy to get the wrong end of the stick - facts are facts though and i am happy to be corrected if and when i get my facts wrong.

Thanks (0)
avatar
By moneymanager
30th Apr 2024 01:16

Of course everyone receving UC has a professional to guide them.

Thanks (0)
Replying to moneymanager:
Emma Rawson
By Emma Rawson
30th Apr 2024 09:57

A good point, and another reason why we (and other professional bodies and LITRG) are pressing for decent guidance for everyone affected.

Thanks (1)
Morph
By kevinringer
03rd May 2024 15:10

HMRC argued that Basis Period Reform is essential for MTD ITSA, despite MTD ITSA's original start date of 2018 and HMRC not announcing BPR until 2021. I could understand HMRC's argument if BPR required the reporting of actual profits 6 April to 5 April, but it doesn't. BPR only requires x/365 of the first year and y/365 of the second year. And at the time the Tax Return is completed, because the following accounts are unlikely to have been prepared, the y/365 will be using estimates that MTD software don't generate. I just don't see any connection between MTD and BPR. What am I missing? Did HMRC use MTD as an excuse? Or is there a "part 2" to BPR yet to be announced?

Thanks (1)