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Putting the record straight on basis period reform

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There’s been some recent confusion over whether changing accounting period in 2023/24 means a business can’t spread excess profits under basis period reform. Emma Rawson gets to the root of the problem.

7th May 2024
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Basis period reform is naturally at the forefront of many agents’ minds as they start to think about self assessment tax returns for 2023/24. For clients who don’t draw their accounts up to 31 March or 5 April, there is the potential for temporary increases in tax bills, as well as ongoing additional administrative burdens and costs.

One solution to these ongoing issues is to move to a 31 March or 5 April year end in 2023/24. However, recent comments on AccountingWEB indicate some agents have (incorrectly) been told that doing so means you can’t spread any excess profits arising under the transitional rules. I’ve also had a worrying number of Association of Taxation Technicians (ATT) members contact me in the past week to say they had been told this by their software houses or a technical helpline.

So what’s going on, and what’s the real answer?

Fundamental change

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. The business can deduct any overlap relief they may have from these transition profits, and may be able to spread any remaining excess transition profits over up to five years.

The problem

The confusion appears to have arisen where, instead of drawing accounts up to their usual year end, a business decides to change to 31 March or 5 April in 2023/24. 

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Replies (37)

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By DonDan
07th May 2024 12:03

I think it is only Iris that are confused on this matter. Their software does not allow the spreading with a change of year end to the 31st March and they are claiming that they are "currently waiting for HMRC to confirm if the spreading is available".

Thanks (8)
Replying to DonDan:
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By TB93
08th May 2024 10:14

It appears that way. I'm sat here wanting to prepare a client's tax return, but unfortunately IRIS simply won't calculate the profits or allow me to manually input the correct calculation.

It's a joke considering these guys are supposed to be top of the league.

Thanks (5)
Replying to TB93:
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By philaccountant
08th May 2024 13:48

Top of the taking money league.

Thanks (5)
Nichola Ross Martin
By Nichola Ross Martin
07th May 2024 12:42

I must admit that I would be surprised if anyone who could do so would not change to 5 April year ends either in 2023/24 or 2024/25. We know that this is not easy for many larger professional partnerships and not changing year ends will lead to having to make estimates in reporting going forward as it won't always be possible to have final accounts when the 31 Jan deadline approaches.

HMRC's calculator allows you to do whatever you fancy. I was playing with it last week. I would certainly (if I had year end other than 31 March - 5 April) be considering preparing two sets of accounts in 2023/24 for the purpose of calculation of transitional profits, one set to my normal year end and time apportioning the profits to 5 April and then comparing those with a one short period of account running from the day after the last a/p and ending 5 April 2024. The figures might be quite similar unless you have huge profit swings. For almost everyone its just easier to then revert to 5 April. Either do that in 2023/24 or 2024/25.

As DonDon notes, there is the issue with accounting software and whether that lets us change.
Also you might need to change your VAT stagger. Although that is less of a problem.

Thanks (7)
Replying to Nichola Ross Martin:
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By wyoming
08th May 2024 10:32

We have a couple of businesses that want to stay with 30 June year-ends and we think we can cope with that as there should be time before the submission deadline to be able to use actual figures (e.g. 30 June 2024 accounts done in time to be able to extract the time-apportioned figures from 1 July 2023 to 5 April 2024 before January 2025). Any businesses with, say, 30 September or 31 December year-ends have pretty much been told they have to change!

Thanks (1)
Morph
By kevinringer
08th May 2024 09:58

Thanks for clarifying this Emma. Almost all the helpful information I have received about Basis Period Reform has been from Emma via AWeb articles, emails or TheThingsWeDoForTax podcast. Thanks Emma. The fact that there is so much confusion is merely a symptom of BPR and HMRC's failure to communicate BPR adequately to the profession, the software industry and taxpayers. I am still at a loss as to why HMRC replaced overlap profits/relief with this massively complex BPR. I wonder how well HMRC themselves have grasped BPR. Maybe, like us, they're dependant on Emma's information.

Thanks (8)
Replying to kevinringer:
Emma Rawson
By Emma Rawson
08th May 2024 11:08

Thank you Kevin - that's very kind. I spend far too much of my life thinking about basis period reform I suspect, but it's good to hear it's been helpful to others!

Thanks (8)
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By zxcvb
08th May 2024 10:34

I'm an Iris Taxfiler user (yes, still not been forced to make the move to Elements). Tried inputting a client's accounts figures for 23 months to 31st March 2024, but Taxfiler will not calculate capital allowances because the period is longer than 18 months. I know I can input manually, but concerned that the longer period will create other calculation errors in Taxfiler . No response to help request yet....

Thanks (0)
Replying to zxcvb:
Nichola Ross Martin
By Nichola Ross Martin
08th May 2024 11:00

Assuming that the aim is to change your A/P to 31/3. This might be a highly simplistic solution but why not prep the accounts for 12 months as normal. Then as a separate exercise prep your accounts for the 11 months to 31 March (transitional profits). If you can't do it on the software, then set up a dummy client to allow you to input the 11 months, and sort out your CAs. Then take your transitional profits and enter them as an adjustment on the 2023/24 return. I was assuming that the transitional profits and the overlap adjustment are all just adjustments to trading profits anyway - as was done when barristers all changed from cash basis to accruals accounting in 1998. You cannot prepare 23 month accounts and expect the software to work out the transitional profits (I think!)

My idea is not perfect as when you prepare accounts for Y/E 31/3/2025...what are your opening balances going to show? I figure that you want them to tie into your TB 31/3/2024 - as that was the 23 months which includes your transitional profits. So I would make an journal adjustment on the first day of the 2024/25 basis period (I think 1/4/2024 in your example).
Hope that helps and not hinders. Its a workaround, that's all.

Thanks (1)
Replying to Nichola Ross Martin:
Emma Rawson
By Emma Rawson
08th May 2024 11:11

That's an interesting workaround Nichola. One thing to note though is that you may well get different transition profits doing two sets of accounts vs one long set. If you go the two sets of accounts route then (generally) the results from the second set will be your transition profits. However, if you go for one long set your transition profits will be based on a time apportionment of the overall results. You'll bring the same overall profits into account in the end, but one route might result in higher transition profits (and therefore more you can spread) than the other.

Thanks (5)
Replying to Emma Rawson:
Nichola Ross Martin
By Nichola Ross Martin
08th May 2024 13:43

Yes, absolutely, there are more variations. Say you currently have a 30 June year end, and you are trying to decide whether to keep the June year end or maybe change in 2024/25. You can draw up accounts to any of these periods and then work through what gives you the lowest transition profit. Bearing in mind it will all get taxed eventually!
Y/e 30 June 2023
Long period 1/7/2022 to 4/5/2024
Short period 1/7/2023 to 5 April 2024
Y/e 30 June 2023 - apportioned by days to get your transition profit for 1/7/2023 to 5 April 2024

Thanks (1)
Replying to zxcvb:
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By susieq
08th May 2024 11:03

I too am still on Taxfiler and have been waiting a week now for them to respond to my request for support. I've done two separate sets of accounts rather than an 18 month period but I can't get it to spread the transitional profit in the tax comp, even though it shows the correct figure for transitional profit. Probably user error on my part but not sure why support haven't come back to me yet.

Thanks (3)
Replying to susieq:
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By zxcvb
08th May 2024 11:58

To get it to work, I've entered the profit for the 2nd, transitional period in "Adjustment to arrive at profit for the basis period" to make "Adjusted Profit" for that period, zero. Then entered the same numbers in the Transitional Profit boxes below. It doesn't seem the right way to do it, but it works.

Thanks (1)
Replying to zxcvb:
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By zxcvb
08th May 2024 11:54

Update - Taxfiler support have replied, telling me that "Taxfiler is only able to accept the long accounting period up to 18 months as per the HMRC guidance". Further advice is to split the accounts into two as Nichola has suggested and manually enter the CA opening balances into the 2nd period. This 2nd period is then the Transitional Profit.
Their connected help page hasn't been updated to the new year and doesn't mention basis period reform or transitional profits, but then I suppose as we are all being forced to move, they see no point in updating.
I've responded to say that I don't agree with their advice about the 18 month period, let's see what they say (if anything).

Thanks (0)
Replying to zxcvb:
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By zxcvb
09th May 2024 17:35

Further update - Taxfiler have replied to say that "The software used the exact same calculations and schemas from HMRC which are implemented unalerted" and have pointed me to the HMRC agent helpline.........

Thanks (0)
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By Wyn Lewis
08th May 2024 10:51

Sadly, it’s not IRIS/PTP’s only software error this year. I’m having most of my Tax Returns corrected by HMRC which is a bit embarrassing. No reply yet from IRIS/PTP with regards Class 2 NIC or the change of year end problem this topic relates to.

Thanks (1)
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By Laurence Benson
08th May 2024 11:43

If you are using the HMRC software to complete your 2023-2024 tax return and you are changing your year end from 30th April to 31st March - i.e accounts from 1st May 2022 to 31st March 2024 - and you decide to prepare 2 sets of accounts (1st May 2022 to 30th April 2023 and 1st May 2023 to 31st March 2024), how does HMRC know the transitional profit relates to the period 1st May 2023 to 31st March 2024 (which you have worked out) as opposed to time apportioning the 23-month period?

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Replying to Laurence Benson:
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By Ardeninian
09th May 2024 09:39

Because you've provided your accounting dates to them?

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By Robin Wishart
08th May 2024 12:22

This clarification is much appreciated AND much needed.
It would have been helpful if HMRC'S Self-employment notes made this clear.
On page SEFN 3, the guidance for Box 9 (Date your books or accounts are made up to or the end of your accounting period) makes no mention of now being able to extend the AP beyond 18 months.

Likewise, there does not appear to be a way to show a shortening of the period so that there would be two APs ending with the one year: one to 30 April 2023 and a second to 31 March 2024.

Moreover, on my system (BTC) when I try to change the AP end date from the previous (30 April 2024) to 31 March 2024 I get an error message stating that the period cannot be longer than 18 months.
Clearly, this is something I must take up with my tax software provider, BTC.

Thanks (0)
Replying to Robin Wishart:
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By Ardeninian
09th May 2024 09:42

APs have always been able to be longer than 18 months.

Just because they they wouldn't be effective for a change of accounting date, or capital allowances have to be calculated in a different way, doesn't mean >18m APs have been verboten.

As for shortening, it's very simple - you prepare two sets of pages, one for each AP. That's in the notes too I think

Thanks (1)
Replying to Ardeninian:
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By Robin Wishart
09th May 2024 11:52

Thanks for advice about doing a second SA103F for the same business.
I didn't realise that was possible.

Re extending AP beyond 18 months:
BTC have responded and advise that they will shortly be issuing an update to their tax software so that Box 9 on SAF103F will accept such a date

Thanks (0)
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By fawltybasil2575
08th May 2024 12:28

Let me throw a curve ball.

Especially (albeit not solely) where there is a strong undulation element to taxable profits (and not forgetting that Capital Allowances may be a factor in such undulation aspect) - let me use 30 September 2023 as an example accounting year-end, and 2023/24 as the first of the two SATRs 2023/24 and 2024/25.

Four factors may come into play:-

(1) The availability of time-apportionment.

(2) The option to use (i) Accounts figures for "12 months and 6 months" or "18 months" (ie combining the two periods) on the 2023/24 SATR).

(3) The option to amend the SATR later (the "6 months to 31 March 2024 figures" can be treated in one of three different ways).

(4) The proposed nonsensical change to a default "cash basis" for 2024/25

May I suggest that, in certain circumstances, most notably where the taxable profits undulate materially, it could be WRONG, and thus potentially ACTIONABLE, NOT to prepare Accounts for the year to 30 September 2023, and later Accounts for the year to 30 September 2024 (since one or more of (1), (2), (3) and (4) above could enable substantial taxation savings to be made).

As ever one must have in mind the equation between (a) the potential taxation savings and (b) the additional costs of preparing Accounts for less than 12 months.

It nonetheless remains the position, IMHO, that, especially where profits undulate materially (emphasising again that such undulations could include the effects of (i) Capital Allowances and (ii) the possible introduction of the cash basis) potential SUBSTANTIAL taxation savings can be made (largely but not solely of course re the resultant impact of higher rates of tax) from preparing Accounts for the YEAR to 30 September 2023 and the YEAR to 30 September 2024.

As ever, a beautifully written article by Emma.

Basil.

Thanks (1)
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By Robin Wishart
08th May 2024 12:34

Emma States:
"The usual restrictions on changing accounting date in s217 ITTOIA 2005 are disapplied from 2023/24."
Can she (or anyone) give me the specific statutory/regulatory reference to quote that states that the 18 month rule is disapplied?
I'd like to be to refer to it when contacting my Tax Software provider.
Thanks

Thanks (0)
Replying to Robin Wishart:
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By Ben Handley
08th May 2024 13:12

Finance Act 2022 stated the following

Chapter 15 (basis periods)
8 Omit Chapter 15 (basis periods).

S217 sits in Chapter 15

https://www.legislation.gov.uk/ukpga/2022/3/enacted

Thanks (3)
Replying to Robin Wishart:
Emma Rawson
By Emma Rawson
08th May 2024 13:31

Hi Robin

Bit of a long one this (apologies!).

The rules restricting you to 18 months are in s217 ITTOIA. The whole of Chapter 15 (which includes s217) is repealed by para 8, Sch 1 FA 2022 from 2024-25 onwards.

In 2023/24, under para 65 of Sch1 you apply Chapter 15 as if the basis period ran from the end of the 2022-23 basis period and ended on 5 April 2024. HMRC have previously confirmed to me that, as the basis period for 23/24 is defined in para 65, the change of accounting date rules in s217 can’t apply to that year as they have no actual effect. So if a business wanted to, it could draw up a very long set of accounts and still ‘validly’ change its accounting date, as there are no implications for an invalid change.

Hope that helps.

Thanks (7)
Replying to Robin Wishart:
Emma Rawson
By Emma Rawson
08th May 2024 13:31

Hi Robin

Bit of a long one this (apologies!).

The rules restricting you to 18 months are in s217 ITTOIA. The whole of Chapter 15 (which includes s217) is repealed by para 8, Sch 1 FA 2022 from 2024-25 onwards.

In 2023/24, under para 65 of Sch1 you apply Chapter 15 as if the basis period ran from the end of the 2022-23 basis period and ended on 5 April 2024. HMRC have previously confirmed to me that, as the basis period for 23/24 is defined in para 65, the change of accounting date rules in s217 can’t apply to that year as they have no actual effect. So if a business wanted to, it could draw up a very long set of accounts and still ‘validly’ change its accounting date, as there are no implications for an invalid change.

Hope that helps.

Thanks (0)
Replying to Emma Rawson:
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By Robin Wishart
08th May 2024 18:36

Many thanks.
Will await response from BTC with interest and pass it on.
I suspect they will blame HMRC.

Thanks (0)
Replying to Emma Rawson:
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By Robin Wishart
09th May 2024 11:53

Re extending AP beyond 18 months:
BTC have responded and advise that they will shortly be issuing an update to their tax software so that Box 9 on SAF103F will accept such a date

Thanks (0)
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By Alison Middleton
08th May 2024 14:31

I have a very useful document White Paper: Preparing your practice and clients for Basis Period Reform issued by accountingWEB in conjunction with Xero, in which you have on page 6 referred to the maximum 18 month period restrictions dropping away.

Page 10 includes reference to ITTOIA 2005, s 217 saying "the business also needs to meet the conditions in ITTOIA 2005, s 217 - i.e. the new accounting period must not be longer than 18 months".

Is it surprising that people are confused?

Thanks (2)
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By geoffmw1
08th May 2024 15:25

n

Thanks (0)
Replying to geoffmw1:
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By geoffmw1
08th May 2024 15:29

n

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By geoffmw1
08th May 2024 15:25

If we now have a situation in which most non incorporated businesses have 31 March or 5 April year ends this could lead to many Accountants having horrible bunching of workloads.
This also interferes withy staff holiday arrangements. I think ICAEW and other bodies need to consult with HMRC for this unwelcome change to be removed.

Thanks (0)
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By geoffmw1
08th May 2024 15:25

If we now have a situation in which most non incorporated businesses have 31 March or 5 April year ends this could lead to many Accountants having horrible bunching of workloads.
This also interferes withy staff holiday arrangements. I think ICAEW and other bodies need to consult with HMRC for this unwelcome change to be removed.

Thanks (1)
Replying to geoffmw1:
Pile of Stones
By Beach Accountancy
08th May 2024 15:49

Sadly that ship has sailed, as:

1) the change has been flagged for a while, and objections should have been raised earlier
2) the Institutes don't obviously stand up to HMRC (e.g. MTDIT)
3) HMRC is always right
4) If HMRC are ever wrong, see (3)
5) At least we're not the US, with a mandated tax year end date, and a short filing window...

Thanks (4)
Replying to Beach Accountancy:
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By GHarr497688
08th May 2024 15:59

The main point is we are not in the USA and HMRC should stop copying other Countries tax rules when the people and taxes are very different. I suppose its the flights and breaks HMRC pay the high up's to investigate other tax systems that creates the farce.

Thanks (0)
Replying to geoffmw1:
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By Ardeninian
09th May 2024 09:47

Because all unincorporated clients bring in their records straight after their year end, and not just before 31 January...

Thanks (0)
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By H LIN
14th May 2024 09:58

I got reply from BTC last month: quoted HMRC guideline for 2 accounting periods for over 18 months.
I encountered the case that 2nd accounting period after deducting overlap relief, makes a loss, but 1st 12 month accounting period makes profit, so loss can be carried to the 1st period, or to be able to carry forward?

Thanks (0)