As of the 5th of April 2024, basis period reforms means that sole traders and partnerships no longer have the choice of when to set their year-end for their business. From now on, accounts must be made up to either March 31st or April 5th.
This means that anyone who does not have their accounts set up with one of these year ends is going to have to submit an extended period of accounts by April 5th 2025.
Let’s use an example to explain what you need to know about basis period reform.
Your accounts were previously made up to November 1st each year and your basis period for 2022/23 was the year ended 1st November 2022. This meant that the tax you paid for the 2022/23 tax year is calculated on your taxable profits for the basis period 2 November 2021 to 1st November 2022. As you did not not have a basis period ending between 31 March to 5 April, you will be affected by the new basis period reform when you prepare your tax return for the 2023/24 tax year onwards.
As a result of this, you will need to get details from two sets of accounts to prepare your tax return on a tax year basis from 2024/25 onwards, as well as pay income tax and self-employment National Insurance contributions based on the profits for the tax year (which will be different to your accounting profits).
Here’s what you’ll need to do for your 2024/25 tax return if you’re impacted by the basis period reform:
For the 2024/25 tax return, you must prepare accounts for the two accounting years 1st November 2023 – October 31st, 2024, and 1 November 2024 – 31st October 2025. You must then, from these two sets of accounts, apportion profits on a pro-rata basis into the 2024/25 tax year to be reported on your 2024/25 self-assessment tax return. This will include the following:
- Profits (or losses) from 6 April 2024 – 31st October 2024 from your first set of accounts (1st November 2023- 31st October 2024), and
- Profits (or losses) from 1st November 2024 – 5 April 2025 from your second set of accounts (1 November 2024 – 31st October 2025).
This is evidently quite a bit more complicated following the basis period reforms, so it’s important you make sure that you understand what you are now required to do by HMRC.
Since it is the case that come the next deadline for submitting your accounts on 5th April 2025, you’ll have more than one year’s worth of accounts to submit and additional tax will be due to be paid to HMRC for this longer period- although it’s worth noting that you’ll have an automatic extended period to pay the additional balance off.
Whilst most sole traders are already likely to be set up with year ends of 31st March or 5th April, those that aren’t need to make sure they’re prepared to deal with these changes. If you previously had an end of year that was not either March 31st or April 5th extra fees should be expected to be charged by accountants as this amounts to additional work that would go into sorting out your accounts (e.g. 18 months instead of the usual 12).
If you need some more information on basis period reforms or would like to speak through your situation with an expert, please get in touch with our team of UK Tax Advisors and Accountants today.
