Freelancers, are you all set for Base Period Reform and MTD for income tax?

How you keep your business records and prepare your accounts as a freelancer can be tricky enough, but there are two planned changes to the tax system which could affect both of these important activities for the self-employed.

Planned by HMRC already, so get planning yourself...

In this two-part article exclusively for FreelanceUK, Claire Thackaberry of the Low Incomes Tax Reform Group (LITRG), an initiative of the Chartered Institute of Taxation, will provide a summary of these changes, ahead of some tax, expenses and work-from-home wisdom (Part 2).

Firstly though, Part 1. Well, what the change potentially affecting how you prepare your accounts – Base Period Reform, and the change potentially affecting how you keep your business records – Making Tax Digital, have in common is that it’s important to plan for both of them, because they may very well be coming your way.

Basis Period Reform (BPR)

This will only affect sole traders or partnerships who do not have an accounting period which ends between March 31st and April 5th. If you already prepare your accounts (and self-assessment tax return) to these dates, or you run a limited company, then BPR will not affect you.

If you do not have an accounting period-end to either March 31st to April 5th, then you will be affected by BPR, which is being implemented from April 2024, with a transition period starting in the 2023/24 tax year (April 6th 2023- April 5th 2024).

Currently, sole traders and partnerships can broadly decide on their accounting period and report this on their tax return. There are some additional rules for when you start or stop your business and how often you can change your accounting period but for most sole traders and partnerships, your tax return figures will reflect the accounting period you choose.

However, from the 2024/25 tax year, all sole traders and partnerships will need to report the profit they make during a tax year (not accounting period) to HMRC. The tax authority is allowing any accounting period end date between March 31st and April 5th to be treated as a tax year for the purpose of BPR.

BPR transition period

To help those affected by the BPR change, there will be a transition period starting from April 2023. The rules are complex and if you have a tax adviser, you may want to discuss what the transition period may mean for your tax and any interactions with areas such as tax credits or student loans. If you don’t have an adviser or accountant, we recommend you consult the LITRG website before the start of the 2023/24 tax year, as we have a specific section for the self-employed which we will be updating to reflect the change.

But keep in mind -- BPR doesn’t mean that you have to change your accounting period end date to March 31st/ April 5th -- you may want or need to keep a different year-end, for commercial reasons, for example. Yet it would most likely simplify your tax affairs if you do so, as otherwise you will be reporting your profits made during the tax year to HMRC but preparing your accounts to a different date.

Making Tax Digital (MTD) for income tax

The second big change for the self-employed is MTD for income tax. This will affect all individuals and partnerships which have turnover over £10,000 a year. It will affect landlords too, so if you have rental income you will need to include it with your turnover when looking at the £10,000 threshold.

MTD is starting from April 2024 for sole traders (and landlords) and from April 2025 for partnerships. It is going to be a significant change in how you keep your business records and report your business income and expenses to HMRC.

You will need to keep digital records of your business income and costs and submit this information to HMRC through quarterly updates and also complete an ‘End of Period’ statement.

The fixed periods for the quarterly updates are as detailed below (an election can be made to change to end on a calendar month):

Quarter update dates

Quarter update dates with election

April 6th – July 5th

April 1st - June 30th

July 6th – October 5th

July 1st - September 30th

October 6th – January 5th

October 1st – December 31st

January 6th – April 5th

January 1st – March 31st

Some key areas of MTD are still being consulted on, but it is important to realise now that HMRC says they will not be providing any free software.

Software providers are being encouraged to develop free MTD-compliant software and there will also be third party software you can purchase. If you have an accountant or tax adviser, you may want to discuss what software they recommend or may want you to use. If you don’t have a tax agent, please check our guidance online, which we will be updating with more information in due course.

Final thought

In summary, part one of this two-part article has flagged up a couple of significant changes to the tax system which could affect many sole traders or partnerships and that you will probably need to get to grips with as a self-employed freelancer over the next two tax years. Don’t delay, get prepared today.