A smooth transition: Embracing digitalisation ahead of the basis period reform

A lot has changed in the 110 years since Ford revolutionised the efficiency of the manufacturing process with the introduction of the assembly line. These days we are turning to digitalisation in order to enhance the efficiency and effectiveness of business activity. And when it comes to the ever-changing compliance landscape, digital can really help business owners keep up.

Sophie Kwiatkowski discusses the upcoming basis period reform - the latest HMRC compliance change ahead of the Making Tax Digital (MTD) campaign. Here is everything you need to know, and how digitalisation could make for a smoother transition.

Technology is synonymous with progress. And looking at how far AI and data technology have come in the past few years shows just how quickly technology is progressing. Running a business means keeping track of constant changes in the market as well as changing compliance requirements.

From a governmental perspective, HMRC’s sights are set on becoming a world-leading tax administration. But reform must happen first.

The basis period reform will require unlimited businesses to report their taxes in line with the financial year (running between 31st March and 5th April). And with transitional rules applicable to this financial year, now is the time to embrace digitalisation and plan ahead.

What is the basis period reform?

A basis period is a period of time for which you need to calculate your business’ tax liability. This applies to those who are self-employed (sole traders) or partnerships. To prepare for the upcoming implementation of the basis period reform in 2024, transitional rules are in place from the tax year 2023/2024. If your accounting period end date doesn’t currently align to the tax year, the transition could mean that you incur extra tax charges on transition profits, as a result of bringing the tax forward on some of your profits.

Businesses whose present accounting period falls outside of the 31st March to 5th April should speak with an accountant as they’ll need to make a couple of changes to the way they declare their profits on their tax return annually. Some businesses may find that with additional transition profits, their tax liability could nearly double in one period.

It’s important to consult your accountant and/or tax advisor to understand how this affects your profits and tax liabilities over the next few years. Nobody likes a surprise tax bill so it’s always best to tackle this head on.

A phased approach to transitional profits

HMRC understand the impact that the basis period reform will have on owner-managers. That is why they have allowed a phased approach to enable the profits declared to be taxed over a longer period of time. This means you are able to spread any transitional profits over a period of five years.

Calculating transitional profits

How you approach your overlap profits will depend on what is best for you and your business, as there is no one way to calculate it.
You will need to look at all profits relating to the period following your normal accounting year end and then you can take any overlap profits off this.

It's also important to note that relief will be given for any overlap profits under the current rules. You can take advantage of this if your current accounting period doesn’t align to the financial year, or if your accounting period was changed in the year 2023/24 and now does align. Overlap relief must be claimed during the transitional year, otherwise it’s lost entirely.

Using digital accounting to mitigate the impact of basis period reform

Digital technology such as cloud-based software can help to ensure that you have all the financial information you need to make informed decisions. By providing a real time overview of your cash flow – it enables you to make forecasts for the future based on more up-to-date figures. It will also help guide you through the basis reform changes that are coming into effect.

By having all your financial records in real-time, you can be proactive from a tax planning perspective. You can speak to your accountant or tax advisor in advance of the tax-year end and put any tax plans into place to reduce the January tax bill using ‘live’ figures.

How is the basis period reform linked to Making Tax Digital?

Making Tax Digital (MTD) requires business owners to keep digital records, using software that is compatible with HMRC’s requirements. For VAT registered businesses, the routine of quarterly reporting is already something being administered, and it looks set to be something rolled out to all those under self-assessment in due course. Reporting more regularly means bringing your accounts into real-time.

The basis period reform will serve HMRC’s MTD campaign though making tax reporting uniform for businesses across the UK, making it easier to implement digital and regular reporting requirements for everyone.

MTD shouldn’t be viewed simply as a compliance measure to satisfy HMRC’s legislation, it’s a process that businesses will benefit from. It brings internal bookkeeping practices up to date whilst prompting business owners to be more proactive through the streamlining of information. In turn, this can help to minimise the administrative burden on you and your team, reduce costs and ultimately maximise profit.

Here to support you

Moving into the digital sphere can be exciting. But it can be daunting too.

But you don’t have to navigate your way through this alone. We have a team of dedicated experts who specialise in digital accountancy practices. We can guide and advise you on a wide range of accountancy and tax issues, whether they are the matters we’ve discussed above, or any other pressing concerns about the digital landscape today.