What Small Businesses Need to Know:

The landscape of tax reporting for small businesses is evolving with the government’s implementation of the basis period reform.
This significant change, primarily targeting sole traders and partners, could lead to unexpected tax bills starting January 2025 for those who don’t align their accounting period with the tax year-end.

 

Who will be affected?
Businesses typically calculate their profit or loss for tax purposes based on their chosen accounting date within the tax year, called the basis period.

Many choose April 5th as it aligns with the end of the tax year, simplifying reporting. However, businesses with different year-end dates face complexities, known as “overlapping basis periods.”

If your business’s year-end falls outside March 31st to April 5th or started trading after April 6th, 2024, you might need to switch to reporting on a tax year basis.

 

How could your business benefit?
According to the Treasury, the reform aims to establish a simpler, fairer, and more transparent system for allocating trading income to tax years. Here’s how your business could gain:

  •  Simplified tax reporting: The new system aims to simplify tax reporting, aligning trading income taxation with other income forms like property income, interest, and dividends. This will make it easier for businesses to understand and comply with tax obligations.
  • Fairer outcomes: The reform eliminates double taxation in the early years of trading, ensuring that the tax liability more accurately reflects the profits earned within the tax year.
  • Improved cash flow management: Paying tax closer to when profits are earned will help businesses manage cash flow better, improve compliance, and reduce tax debt write-offs.

 

What are the negatives?
While the basis period reform aims for simplicity, critics warn it could increase costs for small businesses and the self-employed due to necessary software updates and adjustments.

Additionally, the reform helps businesses avoid double taxation by aligning their accounting dates with the tax year and eliminating the need for overlap relief. However, during the transition, businesses might face higher tax bills as more than 12 months’ profits are accounted for.

 

Claiming overlap relief: what you need to know
If the new basis period reform affects your business, you’ll need to include overlap relief in your 2023-24 tax return.

The government website provides detailed guidance on utilising overlap relief to lower your taxable profits. This relief, typically used by businesses that have ceased trading or changed their accounting dates, can also be applied to overlapping profits during this transition year.

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