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This publication is available at https://www.gov.uk/government/publications/basis-period-reform/basis-period-reform
Who is likely to be affected
The measure will affect self-employed traders, including individuals with a profession or vocation; partners in trading partnerships; other unincorporated entities with trading income, such as trading trusts and estates and non-resident companies with trading income charged to Income Tax. These groups are collectively referred to as ‘businesses’ in this document.
This measure will only affect businesses which draw up annual accounts to a date different to 31 March or 5 April (mainly seasonal businesses and large partnerships), and businesses that commence from 6 April 2024.
General description of the measure
This measure changes the way trading income is allocated to tax years. Generally, businesses draw up annual accounts to the same date each year, called their ‘accounting date’. Currently, a business’s profit or loss for a tax year is usually 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 certain cases, including during the early years of trading. 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’.
This measure changes this to a ‘tax year basis’ with effect from the tax year 2024 to 2025, so that a business’s profit or loss for a tax year is the profit or loss arising in the tax year itself, regardless of its accounting date. This removes the basis period rules and prevents the creation of further overlap relief. On transition to the tax year basis in the tax year 2023 to 24, all businesses’ basis periods will be aligned to the tax year and all outstanding overlap relief given.
The reform aims to create a simpler, fairer and more transparent set of rules for the allocation of trading income to tax years. This reform will remove all existing requirements of the basis period rules such as double taxation of early years of trading profits and maintaining accurate records of overlap profits and relief, which are often lost and not utilised by taxpayers.
At present, two businesses that are identical except for their accounting date may have very different taxable profits for a tax year. The tax year basis will remove this difference, leading to fairer outcomes between businesses. Businesses with non-tax year basis periods currently experience double taxation in early years of trading, with relief generally given on cessation. Using the tax year basis will remove this complexity and lead to a clearer and more transparent relationship between the profits arising in a tax year and the tax liability related to them.
All other forms of income are taxed on a tax year basis for individuals, including property income, interest and dividends. This policy aligns trading income with these other forms of income. For businesses that do not draw up their accounts to 31 March or 5 April, introducing the tax year basis for trading income will bring the payment of tax closer to the time that profits are earned. This will make it easier for businesses to save for their tax obligations, improve compliance, and reduce tax debt write-off. Bringing the payment of tax closer to the time profits are earned will also make the Income Tax system more responsive, giving effect to changes in rates and rules sooner for self-employed people and allowing any future support to be better targeted.
Background to the measure
This measure was put forward as an example of a possible simplification in ‘The tax administration framework: Supporting a 21st century tax system’ call for evidence published on 23 March 2021. A formal consultation on the implementation of the measure was carried out between 20 July 2021 and 31 August 2021. On 20 July 2021 HMRC also published draft legislation for technical consultation. The technical consultation also closed on 31 August 2021.
The reform will take effect for the 2024 to 2025 tax year with a transition year in the 2023 to 2024 tax year.
The current law on the taxation of trading income, including basis periods, is in Part 2 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA). The law currently provides for tax to be charged on the profits of a trade (including a profession or vocation) of the tax year, and that the profits of the tax year are the profits of the basis period of the tax year.
The current law on basis periods is in Chapter 15 of Part 2 of ITTOIA.
Legislation will be introduced in Finance Bill 2021-22 to amend Part 2 of ITTOIA. This will remove the references to basis periods and provide for the profits of a tax year to be the profits arising in that year, in the same way as property and other income.
The rules which currently require apportionment of profits to basis periods will instead require apportionment of profits to tax years. There will be equivalence rules for businesses with accounting dates between 31 March to 5 April to prevent these businesses having to apportion small amounts of profit.
Legislation in Finance Bill 2021-22 will also introduce special rules for the transition year in 2023 to 2024. The basis period for the year will be the 12 months from the end of the basis period from 2022 to 2023, plus a transition component running from the end of this 12 months to 5 April 2024. Any overlap profits brought forward and/or generated will be relieved in full in 2023 to 2024 and not carried forward into the tax year basis.
For businesses with higher profits in 2023 to 2024 due to the change in basis, the government is legislating to automatically spread the transitional period additional profits over a period of five years. The government is also legislating to allow a business to elect out of spreading and accelerate the charge, to treat additional amounts as arising in the tax year. The draft legislation published on 20 July 2021 will also be revised to reduce the impact of transition profits on allowances and benefits, alongside other changes.
Summary of impacts
Exchequer impact (£m)
|2021 to 2022||2022 to 2023||2023 to 2024||2024 to 2025||2025 to 2026||2026 to 2027|
These figures are set out in Table 5.1 of Autumn Budget 2021 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Budget 2021.
This measure is not expected to have any significant macroeconomic impacts.
The terms used in this section are defined in line with the Office for Budget Responsibility’s indirect effects process. This will apply where, for example, a measure affects inflation or growth. You can request further details regarding this measure at the email address listed below.
Impact on individuals, households and families
This measure is expected to have no impact on individuals other than the self-employed and partners with trading income (which have been detailed in the impact on business section). There is expected to be no impact on family formation, stability or breakdown.
Businesses that are expected to be affected by the measure include farming, other seasonal businesses and large partnerships. Data is not available to determine any particular equalities impacts for those in groups sharing protected characteristics, but it is not anticipated that there will be any.
Feedback from consultation indicated that the release of all overlap relief on transition may not benefit some individuals to the same degree as others, as they may not be able to use all of their overlap relief against their income. Out of the affected population, respondents identified that those with insufficient profit to set overlap relief against would likely be individuals on temporary part-time working arrangements. In response to this feedback, the draft legislation published on 20 July 2021 will be revised to allow more flexible use of overlap relief, alongside other changes.
Impact on business including civil society organisations
This measure is expected to have a significant impact on all self-employed traders and partners with trading income who do not currently draw up their accounts to 5 April or 31 March. There are an estimated 528,000 sole traders and partners with non-tax year basis periods. The measure simplifies the method for allocating trading profit to specific tax years, removing the existing complex basis period rules and replacing them with a much simpler method, taxing profits arising during the tax year. Responses to our consultation have suggested that this measure will improve the simplicity of the tax system for small businesses.
One-off costs could include familiarisation with the changes and could also include updating software and guidance to remove the current basis period rules. These costs could also include one-off costs incurred by businesses who wish to move their accounting date to 31 March or to 5 April.
Continuing costs could include the cost of the administrative burden of estimating profit figures for a small proportion (approx. 4% of sole traders and 17% of partners), and of submitting amended returns to provide final figures after the filing deadline. We estimate that this will affect approximately 278,000 sole traders and partners. The population affected is likely to be lower than these estimates when the tax year basis starts, as we expect many businesses to change their accounting date when the measure is introduced.
The measure will also bring forward tax calculations that would otherwise have happened at cessation or on a change of accounting date. For these calculations, associated administrative costs are assumed to be mostly brought forward from future years rather than being additional costs to businesses.
Continuing savings include sole traders and trading partnerships no longer having to familiarise and apply the basis period rules, not having to notify HMRC on a change of accounting date, and not paying tax twice on the same profit without claiming corresponding relief. They would no longer have to inform HMRC of their basis period or calculate and record overlap relief carried forwards in Self-Assessment tax returns. Businesses will no longer risk failing to use their overlap relief if they mislay their records of it, which may date from many years previously. One-off costs on transition are expected to be negligible, and the measure creates a continuing administrative cost saving for businesses.
Estimated one-off impact on administrative burden (£m)
Estimated continuing impact on administrative burden (£m)
|Continuing average annual impact||(£m)|
|Net impact on annual administrative burden||-1.1|
Customer experience impacts could differ between groups.
- This measure could improve businesses experience of dealing with HMRC as the overall tax system will be made simpler for them to understand and comply with.
- This measure could adversely affect businesses with accounting dates not aligned with the tax year and their experience of dealing with HMRC as the change may require them to complete the additional tax admin tasks of estimating profits before accounts are finalised and apportioning profits into tax years. The government is considering options to minimise these additional burdens for businesses.
This measure is not expected to impact on civil society organisations.
Operational impact (£m) (HMRC or other)
There will be operational impacts for HMRC in implementing this measure, both in terms of changes required to HMRC’s IT systems and the extra resource required to support customers in implementing this change. These changes are currently estimated to cost in the region of £13m.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information collected from tax returns and kept under review through communication with affected taxpayer groups.
If you have any questions about this change, please contact the Business Profits Team by e mail: email@example.com.