Changes to Basis Period Rules: what small traders and self-employed need to know

Changes to the Basis Period Rules will simplify accounting for small traders and the self-employed, it has been revealed.

Set to come into force in 2023, the new regime is designed to eliminate complex rules arising when accounts and profits overlap tax years.

If you run a small business, here’s what you need to know.

What are the Basis Period Rules?

Tax returns are based on a business’s set of accounts ending on 05 April – the end of the tax year.

However, when accounts are drawn up to a date different to the end of the tax year, complex rules come into force. This means taxpayers pay tax for their first tax year on the period to the end of the tax year, and then in subsequent years based on their full accounting year, meaning profits are “taxed twice”.

Similarly, complex rules also apply when applying to relieve double taxation.

What’s the problem with the existing regime?

According to HM Treasury, the current system is “confusing to understand” and causes thousands of errors and mistakes in tax returns every year. In addition, over one in two taxpayers affected by the rules “do not claim relief they are entitled to and could pay tax twice”.

What’s changing?

Under the proposed new regime, businesses will only be taxed on profits arising in a tax year, rather than profits of accounts ending in the tax year.

This will align the way self-employed profits are taxed with other forms of income, such as property and investment income.

Commenting on the new rules, Financial Secretary to the Treasury Jesse Norman said: “Simplifying them will allow self-employed people to spend less time doing tax admin and more time growing their business and creating jobs.”

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