Autumn 2021 Budget: Basis period reform

Currently, a business’s profit or loss for a tax year is usually the profit or loss for the year up to the accounting date in the tax year, called the ‘basis period’. Specific rules determine the basis period in certain cases, including during the early years of trading. These rules can create overlapping basis periods, which charge tax on profits twice and generate corresponding ‘overlap relief’ which is usually given on cessation of the business. Overall, this basis of taxation is called the ‘current year basis’.

Following a consultation exercise in summer 2021,  the Government announced in the Autumn Budget and Spending Review 2021 that it would reform these rules with effect from 6 April 2024.

In brief, this measure changes the ‘currrent year basis’ is to a ‘tax year basis’ with effect from the tax year 2024 to 2025, so that a business’s profit or loss for a tax year is the profit or loss arising in the tax year itself, regardless of its accounting date. This removes the basis period rules and prevents the creation of further overlap relief. On transition to the tax year basis in the tax year 2023 to 24, all businesses’ basis periods will be aligned to the tax year and all outstanding overlap relief given.

Provision to this effect is included in the Finance (No.2) Bill 2021-22 – specifically clauses 7-8 of the Bill.