As of the 2024/25 tax year, all affected businesses—that is, those that have an accounting year-end date that doesn’t fall between 31 March and 5 April—must switch to using the tax year as their basis period. This is known as basis period reform.
It doesn’t just affect those within scope of Making Tax Digital for Income Tax Self Assessment (MTD ITSA). Any unincorporated business could be affected.
These businesses will only be liable in respect of profits arising in the actual tax year. Overlap profits or adjustments will no longer exist.
2023/24 will serve as a transition period when businesses will have to move to the new fiscal year basis. They will generate transitional taxable profits after their accounting period ends, all the way through to 5 April 2024, to create a one-off 12+ month basis period.
For accountants it’s vital to prepare now for basis period reform. Doing so ensures you have the best tools at hand, and that you know how to use them effectively ahead of time.
Who does it affect?
Sole traders and partners in trading partnerships are arguably the biggest groups that will need to make basis period reform adjustments. But also affected are other unincorporated entities, like trading trusts and estates, and non-resident companies with trading income liable to Income Tax.
Because most sole traders align their accounting year end date to the tax year from commencement, basis period reform will affect a minority of clients, although this will of course depend on the nature of your client list. It’s anticipated by HMRC that seasonal businesses like farmers, plus medical professionals and businesses with international connections, are most likely to be impacted.
There’s no requirement for businesses to change their accounting date, although not doing so might create complications around apportioning profits or submitting provisional data for MTD ITSA’s end of period statement (EOPS)—and even making estimated tax payments. These will subsequently need to be corrected once the data is known.
What do accountants need to do?
As is often the case with changes to tax law, HMRC is relying upon accountants to get the message out and to explain the details.
Accountants are not just in a position to help their clients but might be the only sources who are able to explain the on-the-ground reality of what the reforms mean for a client’s unique situation.
Yet the task moving forward isn’t just to educate your clients about issues such as the requirement to switch to a new basis period, and the relief measures available from HMRC.
It’s also to walk them through making key choices about whether to adjust their accounting period.
Furthermore, clients may need reminding of overlap profits from when they started their business and documentation may need to be sought from HMRC. Overlap profits will be deducted from the transitional period profit.
It could obviously be challenging for businesses to uncover this information if it is decades old!
The data avalanche
It’s hard to imagine clients not requiring at least some help with basis period adjustments. The need to know the client’s fiscal position at any given moment when an enquiry arrives will become paramount.
This could require gathering together significant amounts of paperwork ahead of the usual deadlines and, of course, converting it to digital format.
But the bigger challenge could arrive when the client expects their accountant to perform tax calculations for a basis period in excess of 12 months.
Again, the sheer quantity of paperwork will be exceptional. For those businesses that retain their non-tax-year accounting date, there might also be an ongoing and renewed importance on accuracy so that estimates of profits are true and reflective. If they aren’t then the client is flying blind, and HMRC might also take a dim view in the long term.
Preparing for MTD
It’s a stretch to call basis period reform a blessing in disguise. But it’s certainly going to be something of a rehearsal for the preparation all accountants will need to undertake for the upcoming MTD ITSA introduction.
More clients are likely to request help with their accounting in order to meet the MTD ITSA requirements. Many practices are looking into providing outsourced bookkeeping services or embracing a Client Accounting Services model (CAS), a concept imported from the US. Effectively, the business outsources their finance department to accountants.
Regardless of which route clients choose, there will be an avalanche of data in order to comply with the periodic reporting requirements, plus several different end-of-period statements (EOPS) if the client has multiple businesses or is also a landlord.
Automation: The vital first step
Basis period reform and MTD ITSA both show how automating data collection is the only sane way forward—especially considering MTD ITSA’s digital linking rules that require a digital journey for the data.
The only alternative is the endless keying in of data, which as well as being labour-intensive, also risks the possibility of inaccuracies.
AutoEntry is the fastest way to accurately capture, categorise and publish financial documents through to accounting software.
Accountants or their clients can photograph invoices, receipts and bank statements using a mobile phone. Alternatively, the document can be scanned and emailed, or simply emailed if it already exists in digital form (e.g. a PDF version of a bill). AutoEntry can even fetch regular documents automatically from online sources, such as bills from suppliers.
Rules can be created to almost entirely automate the process of publishing.
Days of work are literally reduced to hours. One practice reported the time taken to process paper documents was reduced by approximately 80%. Another mentioned that issues around accuracy have become essentially negligible.
Kickstart your automation planning
Basis period reform is the chance to kickstart your practice’s automation take-up, if you haven’t already, before the rush of MTD ITSA begins.
With firmly-established data automation processes already in place, you’ll be able to cope with anything that comes in the future—including MTD for Corporation Tax, some time after April 2026.