While Basis Period Reform became fully effective from the 2024/25 tax year, its consequences continue to impact unincorporated businesses well into the 2026/27 tax year. This reform, which fundamentally altered how trading profits are calculated for income tax, still requires careful management, particularly regarding transitional profit spreading and ongoing administrative duties.
This guide provides a practical overview of what sole traders and partners need to know for the 2026/27 tax year to ensure continued compliance and effective tax planning.
What Did Basis Period Reform Change?
Basis Period Reform replaced the historic ‘current year basis’ of assessment with a ‘tax year basis’. This was designed to create a simpler, fairer, and more transparent system by aligning the taxation of trading income with other income sources like property or investment income.
The key change is the method for allocating trading profit to a tax year.
| Aspect | The Old “Current Year Basis” | The New “Tax Year Basis” (from 2024/25) |
|---|---|---|
| Profit Calculation | Taxable profit was based on the profit of the accounting period ending in the tax year. | Taxable profit is the profit arising in the tax year itself (6 April to 5 April). |
| Complexity | Involved complex rules for opening years, cessation, and changes of accounting date, which often created ‘overlap profits’. | The new rules are much simpler, removing the concept of basis periods and preventing new overlap profits from being created. |
| Overlap Relief | Generated when profits were taxed twice in the early years of a business, with relief typically given on cessation. | All existing overlap relief was utilised during the 2023/24 transition year. |
The reform primarily affects self-employed individuals and partners in trading partnerships who do not use an accounting year-end of 31 March or 5 April.
The Lingering Impact of the 2023/24 Transition Year
The 2023/24 tax year was pivotal for transitioning to the new system. For businesses with non-tax year accounting dates, the basis period was extended, consisting of a ‘standard part’ (the first 12 months) and a ‘transition part’ (the period up to 5 April 2024).
This extended period often resulted in more than 12 months of profit being taxed in a single year. To mitigate the financial impact, these additional ‘transitional profits’ are automatically spread.
- Five-Year Spreading: The transitional profits are spread equally over five tax years, commencing in 2023/24.
- Impact on 2026/27: For the 2026/27 tax year, businesses are being assessed on the fourth of these five instalments. This means 20% of the total transitional profit from 2023/24 must be added to the business’s taxable profit for 2026/27.
This spreading mechanism is a critical, ongoing financial consequence of the reform that directly affects tax calculations for the current 2026/27 tax year.
Key Considerations for the 2026/27 Tax Year
Two years after full implementation, the primary ongoing challenges for affected businesses are managing the transitional profit spread and the administrative requirements of the tax year basis.
1. Apportionment of Profits
For any business with an accounting date that is not 31 March or 5 April, profits must now be apportioned to fit the tax year.
Example: A sole trader makes up accounts to 31 December each year. To calculate their taxable profit for the 2026/27 tax year (6 April 2026 to 5 April 2027), they must:
- Take the profits from their accounting year ended 31 December 2026 and apportion them. Roughly 9/12ths (for the period April to December 2026) will fall into the 2026/27 tax year.
- Take the profits from their accounting year ended 31 December 2027 and apportion them. Roughly 3/12ths (for the period January to April 2027) will fall into the 2026/27 tax year.
The sum of these two apportioned amounts forms the taxable profit for 2026/27.
2. The Use of Provisional Figures
A direct consequence of apportionment is the likely need to use provisional figures. In the example above, the accounts for the year ending 31 December 2027 will not be finalised by the self-assessment filing deadline of 31 January 2028.
This creates an ongoing administrative burden, as businesses must:
- Estimate the profits for the latter part of the tax year to file their return on time.
- Submit an amended return once the final figures are available.
This process of estimating and later amending can complicate tax planning and increase compliance costs.
Practical Steps for Businesses in 2026/27
To navigate the ongoing effects of Basis Period Reform, businesses should consider the following actions:
- Consider Changing Your Accounting Date: The most effective way to eliminate the need for apportionment and provisional figures is to change the business’s accounting date to 31 March or 5 April. Special rules treat an accounting date between 31 March and 4 April as equivalent to the end of the tax year, simplifying reporting significantly.
- Budget for Transitional Profits: When forecasting tax liabilities for 2026/27, remember to include the fourth instalment of the transitional profits from 2023/24. This will ensure there are no cash flow surprises when the tax payment is due.
- Maintain Meticulous Records: Accurate and up-to-date bookkeeping is more critical than ever. It allows for more reliable profit estimates, reducing the margin of error on the provisional tax return and simplifying the final amendment.
For detailed legislative context and specific scenarios, refer to HMRC’s Business Income Manual (BIM81200 onwards) and Schedule 1 of the Finance Act 2022, which contains the primary legislation for the reform.
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