Basis period reform – small businesses to benefit from simplified tax reporting

The government is planning to introduce simpler tax reporting rules for small businesses and the self-employed.

Read on to find out how the new system could work, when it could be introduced, and the potential benefits for your business.

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Simplified tax reporting for small businesses

A business’s profit or loss for their tax return is usually the profit or loss for the year up to their ‘accounting date’ in the tax year – this is called the ‘basis period’.

As a result, many small businesses set their accounting date as 5 April (the end of the tax year) to simplify the reporting of their profit and loss.

However, some businesses draw up accounts on a different date to the end of the tax year, for example 30 June. Paying tax becomes more complicated for these businesses due to ‘overlapping basis periods’.

A business with an overlapping basis period could end up paying tax on their profits twice. This means they’d need to claim ‘overlap relief,’ which is usually paid on the final tax return when a business ceases trading, or if the accounting period changes.

What is basis period reform?

With the planned basis period reform, which is set to come in for the 2024-25 tax year, a business will report the profit or loss that arises in that tax year (regardless of its accounting date).

This means businesses with accounting dates that don’t align with the end of the tax year will no longer have overlapping basis periods. As a result, these businesses won't have to pay tax on their profits twice and claim overlap relief.

According to the Treasury, this will lead to ‘fairer outcomes’ between identical businesses that have different accounting dates.

How could the new system work?

The simplified system, known as a 'tax year basis period', will see small businesses and the self-employed taxed on profits in the tax year they actually occur.

At the moment, if a business draws up its accounts to 30 June, its income tax for 2022-2023 would be based on the company’s profits for the year ended 30 June 2022.

However, the new system would allow the business to pay its 2022-2023 tax return based on three months of income for the year ending 30 June 2022, plus nine months of income for the year ending June 2023.

When will the changes be introduced?

The new system is set to take effect for the 2024-2025 tax year, with a transition year in 2023-2024.

The measures were included in the Finance Bill 2021-22, which was published on 4 November 2021 following the Autumn Budget.

The Bill passed the ‘Committee Stage’ in the House of Commons in early December 2021. It’ll then need to pass through the House of Lords, before receiving ‘Royal Assent’ and becoming law. Keep an eye on our Knowledge centre for updates on how the Bill is progressing.

As well as simplifying basis period rules, the Finance Bill aims to:

• extend the £1 million Annual Investment Allowance to 31 March 2023, to encourage investment
• clamp down on promoters of tax avoidance
• increase the Normal Minimum Pension Age from 55 to 57 from 6 April 2028

How could your business benefit from simpler tax reporting?

According to the Treasury, the current reporting rules lead to thousands of errors in tax returns every year. On top of this, more than half of those affected don’t claim the relief they’re entitled to and end up paying tax twice.

The government has suggested that the new, simpler system will be easier to understand and particularly helpful for new businesses. It'll also allow businesses with different accounting dates to pay tax closer to the time that profits are earned.

Meanwhile, the changes will reduce the number of times those with multiple income streams like a side hustle have to report their income tax.

Jesse Norman, the Financial Secretary to the Treasury, said it will allow small businesses to ‘spend less time doing tax admin and more time growing their business and creating jobs’.

That being said, critics of the new measures have suggested that they could end up costing small businesses and the self-employed more on updating software and getting used to the new system.

Are you ready to file your tax return?

If you’re a sole trader, run a limited company, or you’re in a business partnership, you’ll need to submit your Self Assessment tax return by 31 January.

As filing your tax return can be complicated, visit our Self Assessment and tax hub for top tips on how to fill in your tax return, plus guides on payment on account and self-employed expenses.

Do you think the tax reporting system for small businesses needs simplifying? Let us know in the comments below.

Photograph 1: Monkey Business/stock.adobe.com