Tax period reform represents a significant change for you and the way some of your customers pay their taxes.
In this article we answer questions that you as an accountant and your practice team may have in relation to the reform, who will be affected and what it means for the digital design of income tax self-assessment.
Here’s what we cover:
What is a basic period reform?
The base period reform is a change to the UK tax system which affects how company income is allocated to tax years for income tax purposes.
Traditionally, unincorporated companies in the UK are taxed (for income tax purposes) on profits made in their “accounting period” which ends within the relevant tax year.
However, this will change with the reform of the base period – with the aim of simplifying it.
From April 6, 2024, the tax period will be based on the tax year itself and no longer on the accounting period. This means that unincorporated businesses may need to adapt to a new method of calculating their taxable income.
Here is an example.
Assume one of your customers is a sole proprietor with a year-end of December 31 for the tax year April 6, 2024 to April 5, 2025.
With this in mind, their taxable profits include the following:
- Nine months from the billing cycle ending in December 2024
- Three months from the period ending December 2025.
This change represents a significant departure from the current system and requires careful consideration and planning.
In order to transition from current base periods to base periods adjusted to the tax year, we must also go through a so-called “transition year” in the tax year from April 6, 2023 to April 5, 2024.
This transition year ensures that everything in between is taxed.
6 answers to questions about the basic period reform
You may have many questions about the basic period reform. In the following section we answer some of them.
1. When will the basic period reform take place?
The base period reform comes into force on April 6, 2024 (tax year 2024/25).
However, the transition period begins in the 2023/24 tax year.
2. Who is affected by the basic period reform?
The base period reform affects the following:
- Self-employed people
- Partners in partnerships
- Other unincorporated companies.
Those whose billing cycle end date is on or between March 31 and April 4 will be treated as having an adjusted billing cycle under the standard late billing date rules.
However, taxpayers can waive this if they wish.
3. What connection does the reform of the base period have with the digitalization of tax policy?
The base period reform is closely related to “Making Tax Digital for Income Tax Self Assessment” (MTD for ITSA).
When it comes into effect from April 2026, MTD for ITSA will require covered entities to:
- Keep digital records of income and expenses
- Submit quarterly summary data on these digital records using compatible software
- Complete a final return similar to the current self-assessment tax return you are preparing now.
By aligning the base periods with the tax year, the base period reform simplifies this process and makes it easier for companies to comply with MTD requirements.
It also makes the estimated tax liability calculations far more accurate and therefore more useful to the taxpayer.
4. How do transitional gains affect down payment payments?
Transitional profits can lead to an increase in the income assessed in the transition year and thus to an increase in advance payments for the following year.
However, spreading the relief over five years can help mitigate these impacts.
It is also worth mentioning that the existing regulations for asserting claims for reductions on account will remain in place as part of the basic period reform.
For customers whose deposits have been disproportionately affected, this may be worth checking out.
5. Should we align our clients’ sales tax quarters with the tax year?
It is not necessary to align the sales tax quarters with the tax year.
However, this may be beneficial for some customers for administrative reasons, particularly those whose billing cycle ends on March 31st.
This alignment can simplify accounting processes and make it easier to compare sales tax and income tax documents.
However, the decision should be based on the specific circumstances and needs of each customer.
6. How do transitional gains affect adjusted net income, e.g. B. with regard to the allowance for children with high incomes?
According to Business Income Manual 81320: “Transitional gains are excluded from the net income amount to reduce the impact on benefits and allowances.”
This would suggest that most income-related benefits such as child benefit and therefore the High-Income Child Benefit Charge (HICBC) are not affected by transition gains.
However, it is worth checking your individual entitlements and obligations again with HMRC.
Final Thoughts on Base Period Reform
The base period reform represents a change in the way UK companies approach their tax affairs.
The reform turnaround presents its own challenges, especially in the transition year.
However, it is worth noting that the reform potentially offers a leaner and more transparent tax approach in the long term.
As your practice and your clients adapt to these changes, it is critical to stay informed and proactive.