Basis period reform – how will it affect small business tax reporting?

The way small businesses report their profits is changing as the government rolls out basis period reform.

Sole traders and partners who don’t currently align their accounting period with the end of the tax year could face larger than expected tax bills from January 2025.

If your year-end accounting date isn’t between 31 March and 5 April then you may be affected as you transition to reporting on a tax year basis.

What is basis period reform?

From the 2024-25 tax year, basis period reform requires businesses to report the profit or loss that arises within a tax year (regardless of its accounting date).

This means businesses with accounting dates that don’t align with the end of the tax year will no longer have overlapping basis periods. As a result, these businesses won’t have to pay tax on their profits twice and claim overlap relief.

A government consultation on the issue revealed that it’s likely to affect seven per cent of self-employed people, as well as larger businesses, and partnerships.

According to the Treasury, this will lead to ‘fairer outcomes’ between identical businesses that have different accounting dates.

Simplified tax reporting for small businesses

A business’s profit or loss for their tax return is usually the profit or loss for the year up to their ‘accounting date’ in the tax year – this is called the ‘basis period’.

As a result, many small businesses set their accounting date as 5 April (the end of the tax year) to simplify the reporting of their profit and loss.

However, some businesses draw up accounts on a different date to the end of the tax year, for example 30 June. Paying tax becomes more complicated for these businesses due to ‘overlapping basis periods’.

If you have overlapping basis periods, HMRC has a useful tool that can help you work out what you owe. There’s also a video where they breakdown the details of the change step-by-step.

Experts warn many small businesses are unaware

Tax experts have warned that many self-employed people are unaware of how their tax bill will be calculated, according to a report in the Financial Times.

And HMRC have estimated that around 280,000 sole traders will be affected by the changes being introduced by Basis Period Reform.

As businesses transition to this new reporting process for the tax year 2023-24, many could face higher than expected tax bills.

For example, businesses with a 30 April year-end will pay tax on 23 months of profit in the basis period reform transitional year.

The self-employed will be able to spread the extra tax due on 31 January 2025 across the next five tax years.

Claiming overlap relief

Businesses affected by the transition year may have more than 12 months’ profits taken into account – and therefore a higher tax bill..

You’ll need to include overlap relief in your 2023-24 tax return if the changes mean you have overlapping basis periods.

The government website has guidance on how to use overlap relief to reduce your profits. Usually this relief is for businesses to claim tax back if they’ve stopped trading or changed accounting dates, but this can be used for overlapping profits during the transition year.

How could your business benefit from simpler tax reporting?

According to the Treasury, the current reporting rules lead to thousands of errors in tax returns every year. On top of this, more than half of those affected don’t claim the relief they’re entitled to and end up paying tax twice.

The government has suggested that the new, simpler system will be easier to understand and particularly helpful for new businesses. It’ll also allow businesses with different accounting dates to pay tax closer to the time that profits are earned.

Meanwhile, the changes will reduce the number of times those with multiple income streams like a side hustle have to report their income tax.

Jesse Norman, the Financial Secretary to the Treasury, said it will allow small businesses to ‘spend less time doing tax admin and more time growing their business and creating jobs’.

That being said, critics of the new measures have suggested that they could end up costing small businesses and the self-employed more on updating software and getting used to the new system.

Businesses don’t have to change their accounting date to match the tax year, but this could be more complicated as you’ll still need to report your business profits to HMRC in line with the tax year.

Check the rules on the government website if you want to change your company’s year end accounting date.

Are you ready to file your tax return?

If you’re a sole trader, run a limited company, or you’re in a business partnership, you’ll need to submit your Self Assessment tax return by 31 January.

As filing your tax return can be complicated, visit our Self Assessment and tax hub for top tips on how to fill in your tax return, plus guides on payment on account and self-employed expenses.

Were you aware of basis period reform and how the changes could affect your business? Let us know in the comments.

More useful articles for small business owners

• How to set up an HMRC personal tax account
• What is HMRC Time to Pay? Pay your tax bill in instalments
• What do Companies House reforms mean for small businesses?
• Do I need employers’ liability insurance?

Photograph 1: Monkey Business/stock.adobe.com