An HMRC rule change could catch many self-employed individuals by surprise, warns tax experts.
The rule change, known as the Basis Period Reform, is a significant shift in how taxable profits are reported by sole traders and partnerships.
With a target implementation date of April 2024, this reform could have far-reaching implications for hundreds of thousands of UK businesses.
Understanding the Change
Traditionally, businesses have reported their taxable profits based on their own accounting years.
However, the Basis Period Reform mandates that from April 2024, all sole traders and partnerships must report their taxable profits up until April 5, aligning with the tax year, irrespective of their accounting year end.
Despite the significant impact of this reform, there has been concern over the lack of widespread publicity.
Many businesses, especially those without tax advisors, remain unaware of the impending changes, potentially leaving them unprepared for the transition.
The Transition Year Challenge
The 2023/24 tax year is set as a transitional period, with businesses expected to report more than 12 months’ worth of profit.
This extended reporting period will be a one-time occurrence, due to the policy shift, but could lead to an increased tax burden for the affected tax year.
For those facing this change, there’s a silver lining in the form of ‘Overlap Relief.’
The Overlap Relief provision allows businesses to spread their ‘transition profit’ — profit that is accounted for more than once during the changeover — over the subsequent years, up to the 2027/28 tax year, softening the financial hit.
HMRC has positioned the Basis Period Reform as a simplification measure, aiming to eliminate the complexities of the current system and prevent the issue of double taxation.
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