There are going to be quite a lot of changes to the way that businesses record and report their accounts over the next couple of years with the rollout of the Making Tax Digital scheme.
One of these changes is the removal of basis periods from the tax year 2022 – 2023.
What are Basis Periods?
Basis period reform is the term that’s being used by HMRC which describes the process of aligning everyone’s end of year tax dates, so that they all fall between 31st March and 5th April every year. This process is happening alongside the Making Tax Digital changes.
HMRC state “The overall objective of the proposal is to simplify the taxation of trading profits. This is in line with stakeholder requests to simplify this part of the tax system.
The current year basis requires a set of rules to cover all eventualities. After the transition year in 2022 to 2023, the tax year basis would require much simpler rules to cater for the taxation of businesses.”
What changes will happen?
Businesses draw up annual accounts to the same date each year (their accounting date). Currently, a business’s profit or loss for a tax year is usually calculated from the profit or loss for the year up to the accounting date in the tax year, called the ‘basis period’.
Specific rules determine the basis period in some cases. These rules can create overlapping basis periods, which charge tax on profits twice and generate corresponding ‘overlap relief’ which is usually given on cessation of the business. Overall, this basis of taxation is called the ‘current year basis’.
When transitioning to the new aligned tax year basis in the tax year 2022 to 2023, all businesses’ basis periods would be aligned to the tax year and all outstanding overlap relief given. This means that in some cases, you may have to submit up to 23 months of accounts in one go, to be able to align to the correct tax year dates. However, this is a worst case scenario – some businesses would only have to submit 13 months to align.
Who does basis periods apply to?
The realignment process will only apply to those individuals that are either a sole trader or a partnership, and your end of year tax date is NOT between the 31st March and 5th April.
There is currently no guidance on overlap profits, however it is expected that you will need to offset your overlap profits at the point of alignment. This would usually happen when you close a business.
If you’re not sure how these upcoming changes will impact the way you run your business, get in touch with us and we can talk you through it.