Basis Period Reform – time to start planning

Category: LeisureTaxation - Posted On: Apr 21 2023

The UK Government have confirmed that the basis period reform will go ahead as planned. This means that the profits and losses of sole traders and partnerships, of which many Furnished Holiday Let (FHL) businesses are operated, will be calculated based on the tax year itself, not the accounting period ending in the tax year as is currently the case.

While many operators will run their business in line with the tax year already, we have seen several where this is not the case, and the upcoming changes could have a significant impact on tax and cash flow.

These changes will come into effect from 6 April 2024 and for those business who do not use 5 April or 31 March as their accounting date, there will be a transitional year, tax year 2023/24. The profits chargeable in the transitional year will be the 12 months to the date of the accounting period ending in that year together with the period to the 5 April 2024. For businesses with a 30 April year end, this will result in almost two years of profit coming into charge and they could see a significant increase in their tax liability. This can be minimised by overlap profits brought forward from the start of the trade as these can be deducted from the additional profit in the transitional year, however not all business will have any overlap profits, or the amounts may be negligible.

The additional profits from the transitional period will automatically be spread over a five year period, however the taxpayer can choose to bring forward some or all of those profits, with careful tax planning this election could be used to prevent or reduce profits from being taxed at higher tax bandings.

The change may also impact the reporting of profits to HMRC where the business chooses not to elect to change their year end to 31 March/5 April. In this scenario, the profits reported will be a hybrid of two financial years adding more complexity and possible costs to compliance reporting.

Now is the time to prepare for these changes and check what impact they will have on your business and cashflow. To discuss how our EQ Leisure team can help your business prepare for the basis period reform, please email or call one of our offices.