What you need to know about HMRC’s new basis period rules

It has been reported that HM Revenue & Customs is modifying the basis period regulations that are applied to the calculation of self employment and partnership tax. If your business compiles its financial statements to any annual accounting date other than 31 March or 5 April, then you will be affected by these changes.

Accounting earnings are currently taxed on a ‘current year’ basis, so if your accounts year finishes on 30 June 2022, for example, the tax year in which those gains would be levied will be 2022/2023.

However, from tax year 2024/2025, profits will be subject to new regulations. No matter what date your books are closed, you will be taxed on the profit you make in that tax year up until 31 March or 5 April.

In order to make the transition from the old basis to the new basis, special regulations will apply during the 2023/2024 tax year.

What it means for your tax liability

You may have to pay taxes on more than one year’s worth of earnings in the 2023/2024 transitional year. For example, you would be taxed on 23 months of profit if you currently file accounts to 30 April (from the end of the previous accounting period on 30 April 2022 round to 31 March, or 5 April, 2024). In a situation like this, if you have any “overlap relief” from when you started the business, now might be a good time to use it to offset against these profits.

Exactly how these adjustments could influence your tax obligations is, of course, individual to your business. While some taxpayers may see no change in their January 2025 bills, those in self-employment or partnerships are expected to see substantial increases.

Possible next steps

January 2025 may seem like it is a long way away, but it is vital to know how these changes could affect you so that you can plan ahead for them. To avoid being caught off guard, here are the important points we want our clients to take away from this article:

• It is possible that you’ll need to adjust the date of your accounting year end
• In order to complete your 2023/2024 tax return, we may need to create two separate sets of financial statements
• It is possible that we will require access to your financial data earlier than in previous years
• You could have some larger tax bills to pay in the near future

Nobody likes paying more tax than they are used to – but with proper planning, HMRC’s new basis period rules shouldn’t upset your business. If you want more information about these changes, call JW Hinks on 0121 456 0190.