What is basis period reform?

Definition of basis period reform

Basis period reform is the term used to describe legislation introduced by the UK government to change the way that trading income is allocated to tax years. 

Basis period reform will take effect for the 2024/2025 tax year with a transition year in the 2023/2024 tax year.

What’s changing?

In order to understand how basis period reform will affect businesses, we have to first understand the current rules.

The current rules

Sole traders and partnerships have to prepare their accounts for one year at a time and, as such, have to choose a start date and end date for the year they’re filing for. The period between these dates is known as their accounting year. 

To align with the tax year, many businesses choose to start their accounting year on 6th April and end it on 5th April of the following year. However, some businesses (around 528,000 sole traders and partners, according to HMRC) choose different dates.

Under the old rules, a sole trader or partner includes on their tax return the profit it made for the accounting year that ends within the tax year covered by that tax return. 

For example, when filing a tax return for the 2022/23 tax year, a sole trader who has a 1st January to 31st December accounting year - and has been trading for a while - would include their profits for the accounting year that ended 31st December 2022. This is because that’s the accounting year end that falls in the 2022/23 tax year.

The new rules

Under the reformed rules, all sole traders and partnerships will be taxed on the profits they made in the tax year: 6th April - 5th April. This is regardless of when their accounting year ends.

This measure will only affect businesses that draw up annual accounts to a date different to 31st March or 5th April, and businesses that commence from 6th April 2024.