Basis period reform: Practical considerations for tax practitioners
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
2 October 2023
As tax practitioners consider the impact of basis period reform on their clients, we review some practical issues for them to consider in the coming months.
For unincorporated businesses which do not have a 31 March or 5 April accounting year end, basis period reform means that the established rule for the taxation of trading income, called ‘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.
As tax practitioners support their clients with the implementation of basis period reform, we have been assisting with member queries and collating their feedback about the impact that this change will have on their clients. ICAS has ongoing dialogue with HMRC about practical issues and recently released an on-demand webinar covering the latest basis period reform developments.
HMRC has also issued some updated guidance on the changes to the basis periods for unincorporated businesses which do not currently have an accounting date ending on 31 March or 5 April.
Overlap profit relief
For those clients whose overlap profits are not known, there is a new online form to request information on overlap profits. By introducing this online form, HMRC will be able to direct requests to a team dedicated to responding specifically to these forms, which should result in tax practitioners receiving a prompter reply than by general post.
Payments on account
In most cases, unincorporated businesses affected by basis period reform will have additional taxable profits arising in the 2023/24 tax year, as well as the following four tax years if the transitional profits are being spread under schedule 1 paragraph 72 Finance Act 2022.
For each tax year with additional taxable profits, this will have a knock on impact on the payments on account for the following tax year. The basis period reform rules do not affect the ability of a taxpayer to claim to reduce their payments on account, subject to the normal rules that interest will be charged by HMRC if the reduced payments on account do not cover the final liability of the year.
Impact on student loan assessments
Self-employed taxpayers who are repaying a student loan will continue to repay their student loan in the normal way via self-assessment. Additional transitional profits as a result of basis period reform will increase the student loan being repaid for each year where the transitional adjustment is being recognised.
We have been able to confirm with HMRC that the same principle will apply in respect of parents who are self-employed and have a child who has applied for a student loan when in further or higher education. The income being reported to Student Awards Agency Scotland, Student Finance England, Student Finance Wales, or Student Finance Northern Ireland will be based on the income as adjusted for transitional profits.
For those clients who have a child receiving a student loan, this could influence a decision to accelerate the transitional adjustment under schedule 1 paragraph 73 Finance Act 2022. This adds an extra dimension to broader tax planning considerations involving the spreading of transitional profits.
Let us know your views
Please share your feedback on the implementation of basis period reform and how it will affect you and your clients.
More generally, we also welcome members’ input to inform our work on consultations or other tax-related matters – email us to share your insights and feedback. 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.
