Basis of assessment changing

The basis of assessment reforms will change the way trading income is allocated to tax years. The changes will affect sole traders and partnerships that use an accounting date between 6 April and 30 March. There is no change to the rule for companies.

The reforms will change the basis period from a ‘current year basis’ to a ‘tax year basis’. Under the current rules, there can be overlapping basis periods, which charge tax on profits twice and generate corresponding ‘overlap relief’ which is usually given on cessation of the business. The new method of using a ‘tax year basis’ will remove the basis period rules and prevents the creation of further overlap relief. 

The new rules will come into effect in the 2024-25 tax year with 2023-24 being a transitional year. During the transitional year, all businesses’ basis periods will be aligned to the tax year and all outstanding overlap relief can be used against profits for that tax year.

Affected businesses in 2023-24 will be assessed on the tax for profits for the:

• 12-month accounting period they have previously been using and

• for the rest of the 2023-24 tax year — minus any overlap relief that may be due — spread over the next 5 tax years.

The changes do not affect sole traders and partnerships who draw up annual accounts to a date between 31 March and 5 April.

Affected businesses should ensure they are prepared for the changes as there may be implications on areas such as cash flow by accelerating profits into an earlier tax year as well as increased compliance costs. For some businesses changing their accounting date to 31 March or 5 April may be beneficial although this is not compulsory and the timing of such a move must be carefully considered.