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How will the basis period reform affect your business cash flow from the 2024-25 tax year?

How will the basis period reform affect your business cash flow from the 2024-25 tax year?

Mike Wakeford


The basis period rules for unincorporated businesses are being changed from the 6 April 2024, with a transitional year of the 2023/24 tax year.
The new rules will not change the accounting period of the business (although you may wish to consider this), however the tax position will move from a current year basis to a tax year basis. This will mean that  business profits will be calculated for the tax year rather than for the period of account ending in the tax year.

While this blog highlights the changes coming into affect from 6 April 2024, there is a transitional year which you can read more about here.

Who is going to be affected?

Unincorporated business that prepare accounts to a date other than one between 31 March and 5 April inclusive, as well as any in the list below that commence trading from 6 April 2024:
  • Self-employed individuals
  • Partners in partnerships
  • Other unincorporated entities with trading income (such as trading trusts, estates and non-resident companies)
After the transitional year

Moving to the tax year basis period will require businesses to report for the 6 April – 5 April tax year for all trading purposes. Businesses with non-tax year accounting periods will be required to apportion profits or losses across two accounting periods to adjust their results to the tax year basis. For any periods where accounts are not yet finalised, this apportionment will require estimation and subsequent finalisation, including possible amendments to tax returns.

Estimating and allocating profits to tax years

From the 2024/25 tax year, owners will be taxed on the profits their businesses generated in the same tax year of the accounting period. Businesses can choose to use a different method of measuring the length of the two accounting periods if seen as reasonable.

The end of period statement (under Making Tax Digital) and the business owner’s self assessment tax return will potentially need to be filed before the profits and accounting figures from the later accounting period have been produced, this will mean estimates are required for the return.

Once the final accounting results have been determined and taxable profits calculated, it is likely that an amended return will be filed to reflect these and replace the estimates. Please speak to a Moore adviser on the best ways to do this.

You may want to discuss the possibility of changing your accounting period to align with the tax year going forwards to minimise any estimates required.

Overlap profits

Commencement, cessation and changes of accounting dates will no longer apply to opening year and cessation rules. This will eliminate overlap profits and the need for overlap relief in the years after the changes. As it stands, HMRC have said the transitional arrangements do provide for use of existing accrued overlap relief

If the business has any overlap profits, it must offset these against the profits of the 2023/24 tax year. There is no option to allow the business owner to defer the use of overlap relief and save it up to use on another occasion (e.g. retirement).

There are a number of other areas of preparation and questions that arise on the new rules, to ensure you are ready, please contact us