Basis period reform and default cash basis – implementation is getting close
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
26 March 2024
As April 2024 approaches, we look at the latest developments in basis period reform alongside the move to default cash basis for unincorporated businesses.
Over the last few months, tax professionals have been supporting their unincorporated clients on the implementation of basis period reform. This will affect unincorporated businesses who don’t have a 31 March or 5 April accounting year end, as the ‘current year basis’, will be replaced with a new ‘tax year basis’ rule going forward. This change will take effect from the 2024/25 tax year, with 2023/24 being a transitional year.
It's important to bear in mind that a taxpayer’s basis period and relief of overlap profits will be personal to them. If they are a member of a partnership, any basis period adjustments will be recorded on their personal tax return. Indeed, two partners in a partnership may be affected differently, depending on when they joined the partnership and the available overlap profits.
New HMRC guidance
Last month, HMRC issued a letter to unrepresented taxpayers about the basis period reform rules to make them aware of the changes they need to prepare for. Additional guidance has also been prepared, along with a YouTube video covering the key concepts. A copy of the letter has been saved here.
While it is envisaged that the majority of unincorporated businesses will opt to use a 31 March or 5 April year end going forward, there is nothing in the tax legislation that require them to do so. If an unincorporated business continues to use a different year end, it will be necessary to apportion the profits/losses of the business to a tax year going forward – potentially increasing the time taken to prepare a tax return.
Limited Liability Partnerships
We have become aware of an issue with regards to Limited Liability Partnerships (LLPs) experiencing issues with changing their year end. It is our understanding that Companies House will not consider basis period reform to be a significant enough reason to change a year end, if there has already been a change of year end in recent years.
This however should only be an issue when it comes to extending an accounting period when a period has previously been extended. An LLP should be able to have an additional shorter period, should it wish to move to a 31 March or 5 April year end.
HMRC online form to request overlap profits
We have received very positive feedback about HMRC’s G-form to request information on overlap profits. HMRC has advised us that it is turning requests around within a reasonable timeframe.
However, demand is expected to increase as the 31 January 2025 deadline approaches for the self-assessment tax returns for the 2023/24 tax year. To avoid delays in receiving information later in the year, taxpayers (or their agents) are encouraged to use the service to apply for their overlap profit information as soon as practical.
Change to the cash basis for the self-employed
The new tax year also sees the expansion of the cash basis for the self-employed. Following the announcement in the 2023 Autumn Statement, Schedule 10 Finance Act 2024 outlines that the cash basis for unincorporated businesses will apply in most circumstances by default regardless of turnover. Previous restrictions on the deductibility of interest costs and ability to relieve losses are being removed.
A new Section 25B Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) sets out the excluded trades, which the Treasury can update by regulation. Excluded trades includes firms with partners who are not individuals as partners, LLPs, businesses using herd basis or averaging and businesses who have claimed business premises renovation allowance in the previous 7 years.
With the exception of the excluded trades above, it will still be possible to claim for the accruals basis to apply instead of the default cash basis. An election can be made under the new Section 25C ITTOIA 2005, which will stay in place until it is revoked or the business carries out an excluded trade.
HMRC manuals have guidance on the treatment to be taken when entering the cash basis and leaving the cash basis. This is designed to ensure that income is only taxed regardless of changes between the basis.
In terms of preparing for this change, as well as considering any impacts of basis period reform, tax professionals will need to consider whether their clients should accept the move to cash basis by default or opt for the accruals basis election.
Let us know your views
We welcome your views, which help inform our work on consultations or other tax-related matters. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by members.
Please email tax@icas.com to share your insights and feedback.
