HMRC have published a new consultation ‘Basis period reform’ alongside a policy paper and draft legislation that propose a simplification of the Income Tax rules for the self-employed by allocating trading profit to tax years regardless of the business’ accounting period end date.

At a glance

Current position

Currently, an unincorporated business is taxed on the profit or loss for the 12 months ending with the accounting date which falls in the tax year, known as the ‘current year basis’. The period for which profits/losses are taxed under this current year basis is the ‘Basis period’

Proposed changes

HMRC are proposing to change the basis period for all unincorporated businesses to the end of the tax year, currently 5 April, with effect from 2023-2024. This will be known as the ‘tax year basis’.

In a ministerial statement issued in September 2021, the government announced that the reform will now take place in 2024 and the transitional period will run between 2023-24.

If introduced the proposed changes would become effective before Making Tax Digital for Income Tax becomes mandatory. The consultation will run alongside a review by the Office of Tax Simplification about moving the end of the tax year to 31 March or 31 December though currently no indication has been given of when this might take effect.

There is currently no proposal to make businesses align their accounting periods with the end of the tax year. HMRC recognise that for some types of business this would be difficult, but expect that many may choose to do so to avoid apportionment calculations or the use of provisional figures. HRMC are taking opinions on this point as well as an alternative option of a Corporation Tax approach where payment and filing deadlines are driven by the business’ accounting date.

HMRC estimates that 93% of sole traders and 67% of partnerships already draw up accounts to 5 April or 31 March and will be unaffected by the proposed changes.

The consultation ends on 31 August 2021 and responses should be sent toThis email address is being protected from spambots. You need JavaScript enabled to view it..

Useful guides on this topic

Accounting periods and tax basis periods
Which date do I choose? Does it matter? Can I change my accounting date?

A new business? Start here...
Starting in business? Our 'At a glance' guide takes you through the key steps in getting started for tax, with links helping you drill down for more detail.

New business: Sole trader compliance checklist
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Accounts: Tax health check (self-employed)
This is a checklist that will provide you with a lot of pointers to key areas of discussion with sole trader clients. 

Partnerships: How to prepare partnership and partners tax returns
How to prepare partnership returns. How are partnership profits calculated? How are corporate members of partnerships taxed? Are there anti-avoidance provisions to consider?

Will I pay less tax if I trade in partnership??
Will I pay less tax if I trade via a partnership or an LLP compared to if I trade via a company or as a sole trader?

MTD: Income Tax Pilot Tool
Making Tax Digital (MTD) for Income Tax. Are you eligible to take part in the MTD Pilot?

MTD: Toolkit for accountants
What is the current timetable for Making Tax Digital (MTD)? How will it work? Which clients will be excluded? What planning needs to be undertaken?  

External links

Policy paper: Income tax basis period reform 

Consultation: Basis period reform 

Ministerial Statement 23/9/2021

Consultation questions

Consultation questions

Q1: Do you think that the proposed ‘tax year basis’ for trading income is the best option for simplifying the basis period rules, and the best way to achieve simplicity and fairness between businesses? If not, do you think there is a better option?

Q2: Will the proposed tax year basis have an effect on how businesses choose their accounting date, and whether they choose 31 March or 5 April?

Q3: For businesses with a non-tax year accounting date, what would be the cost of the additional administrative burden of apportioning profits into tax years? Are there any simpler alternative approaches to apportionment?

Q4a: Businesses with accounting dates later in the tax year will have to estimate profits for a proportion of the tax year, before accounts are prepared. For which accounting dates do you think this would be necessary? Do you expect that businesses that have accounting dates earlier in the tax year than 30 September will have to estimate profits? If so, which types of business would be affected?

Q4b: Will estimation be a significant burden for those businesses affected, and what will the cost be? Are there any simpler alternative methods of estimating profit or finalising estimates, which could mitigate any extra administrative burden?

Q5: Would the proposed equivalence of 31 March to 5 April help businesses that would have to make apportionments to work out their profit or loss under the tax year basis? Would extending this equivalence to property income help property businesses, which would otherwise have to apportion profit or loss each year? Are there any problems with this equivalence proposal?

Q6: Are there any specific issues, costs, or benefits to the tax year basis for partners in trading partnerships?

Q7: Are there any other issues and interactions to consider for the tax year basis, or the transition, in the areas of tax outlined in paragraph 3.33?

Q8a: Does the proposed method of transitioning to the tax year basis using a long basis period combined with allowing all unused overlap relief achieve the best balance between simplicity and fairness? If not, is there a better option for transition?

Q8b: Are there any other specific circumstances on the transition to the tax year basis that would require additional rules?

Q9a: Would the proposals for spreading excess profit mitigate the impact of transition without affecting the simplification of moving to the tax year basis? If not, are there any other ways of mitigating the transition impact that you would suggest?

Q9b: Would the proposal to spread excess transitional profits over five years be enough to resolve the cash flow impacts of the proposed reform? Are there any situations that would need additional rules or anti-avoidance provisions?

Q10: Are there any other impacts, benefits, or costs in the core policy, transition, or mitigation proposals that we have not considered above?

Q11: Please tell us if you think there are any other specific impacts on other groups or businesses that we have not considered above.

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