Basis Period Reform: What You Need to Know as a Self-Employed Individual or Landlord

Starting from the 2024/25 tax year (6th April 2024), HMRC is introducing a significant reform to simplify how self-employed individuals, landlords, and unincorporated businesses are taxed. This reform will remove the ‘Basis Period’ method of taxation, which has traditionally taxed businesses based on their accounting period rather than the tax year. The Basis Period system often led to complex tax calculations, particularly for businesses that began trading partway through the tax year.

The new reform is designed to make the tax process clearer, reducing the potential for double taxation and other complications for self-employed individuals and businesses. The reform will involve a transition period during the 2023/24 tax year, which will allow businesses to adapt to the changes.

Under the previous Basis Period system, if a business started trading partway through a tax year, it was required to choose an accounting period that could extend into the following tax year. This resulted in businesses being taxed on profits made during an accounting period that crossed two tax years.

In some cases, businesses could end up being taxed twice for the same profits during the first year of trading, known as double taxation. This situation was alleviated by overlap relief, but it often caused confusion and was typically applied only when the business ceased trading, making it less useful for many businesses.

Moreover, additional complexities arose with varying accounting dates and special rules that applied to businesses with accounting periods ending close to the tax year’s end. These made the Basis Period system challenging to navigate, especially for new and growing businesses.

To ease the impact of the reform, HMRC has set up a transition period during the 2023/24 tax year (with a tax return deadline of 31st January 2025). This transition period allows businesses to start fresh from 6th April 2024, aligning their accounting periods with the tax year.

During the transition, businesses will be taxed on a long period of account, which will include both their standard period (the period up until the end of the 2023/24 tax year) and a transitional period up to the end of the tax year (5th April 2024). Any outstanding overlap relief can be applied during this time, and businesses can spread any additional profits from the transitional period across five tax years, including the year of transition. This spreading helps ease the financial impact on businesses by reducing the upfront tax burden.

The Basis Period Reform will primarily affect the following groups:

• Sole traders (self-employed individuals)
• Unincorporated partnerships and LLPs, including individual partners

The changes are specifically aimed at businesses that do not currently align their accounting period with the tax year, i.e., businesses that don’t prepare their accounts to a year-end date between 31st March and 5th April. These businesses will need to adjust their accounting dates to comply with the new rules.

If you’re a sole trader, landlord, or part of an unincorporated business affected by the Basis Period Reform, Tax City UK is here to guide you through these changes. Our expert team is ready to help you make the necessary adjustments to your accounting dates, ensuring compliance with the new tax rules.

We offer an annual support package starting from just £119, which covers the preparation of your tax return and provides unlimited support for one year. This package is ideal for businesses seeking clarity and assistance during the transition period.