Basis Period reform: At a glance

From 2024-25, all unincorporated (self-employed) businesses will be taxed on their profit or loss arising in the tax year, regardless of their accounting end date. 2023-24 is a transitional year.

This is a freeview 'At a glance' guide to tax Basis Period reform.

Subscribers, see Basis Period reform for more examples of how the new rules work and FAQ’s.

At a glance

• Under the current rules for Self Assessment, sole traders and partners are taxed on the profits of their business accounting period that ends in that tax year: this is the Current Year Basis (CYB).
• The Current Year Basis ceases from 2024-25 when all unincorporated businesses will be taxed on their profit or loss arising in the tax year, regardless of their accounting end date. This is the Tax Year Basis (TYB).
• 2023-24 is a transitional year for businesses whose year-end is not coterminous with the tax year or not deemed to be, i.e. they have a year-end earlier than 31 March. These businesses will be subject to a special profit catch-up rule.
• Businesses with a year-end of any date from 31 March to 4 April will be deemed to have a 5 April year-end.
• This change does not affect property rental business which should already use a 5 April period end for tax.

Summary of basis period reform rules by accounting period

Comparison of the rules for a March 31 year-end with say a 30 September year-end. 

Transitional Year 2023-24 

Businesses with accounting periods that do not end between 31 March and 5 April will be transitioned across to the new Tax Year Basis during the tax year 2023-24. 

• The tax year 2023-24, for those who do need to transition, will be based on the CYB plus the remaining profits arising in the year, from the day after the accounting period end to 5 April 2024.
• Overlap profits brought forward will be available to offset in full in the year. No overlap profits will be available to carry forward into 2024-25.

Example: A business has a 30 September year-end. In the year ended 30 September 2023, the profits were £15,000. The year ending 30 September 2024 has anticipated profits of £12,000. There are £3,000 of overlap profits brought forward. The profits in 2023-24 will be calculated as follows;

NOTE: If either the amount from Step 3 or the amount given by Step 4 (or both) give an amount of nil or less, the amount resulting from Step 4 will be the chargeable profits for 2023-24. Otherwise, move to Step 5.

Transitional profits

Where the above calculation gives rise to transition profits, this increased profit will be automatically spread over five years and taxed in those years to ease the financial burden.

• In each of the four years beginning with the transitional year of 2023-24, 20% of the additional profits will be taxable.
• In the fifth year, the balance of the additional profits will be taxable.
• If, before all of the additional profits have become chargeable to tax, the business ceases to trade, the remaining balance will be taxable in the year of cessation.

An election can be made to tax any or all of the excess in any given year within those five years.

• The election must specify the amount to be taxed.
• The time limit for the election is the first anniversary of the filing date of the original Self Assessment return for the tax year in which the business wishes to bring in additional transitional profits.

Where the election is made, any remaining additional profits will be spread across the number of years out of the five that still remain, as follows:

Take the total transitional profits and reduce by:

A x 5/T

Where A = additional profits under the election and T = no of years left (out of the five).

This gives a revised transitional profit figure. 20% of this is taxable in each of the remaining years. 

Example:

A business has transition profits of £10,000. In years one and two, the business was taxed on an additional £2,000 profits p.a. as part of the spreading of the £10,000. In year three an election is made to tax another £500 on top of that year's allocation of £2,000. The payments remaining in Years four and five are calculated as follows:

Transition profits less (Ax5/T) @ 20%

£10,000 - (500 x 5/2) @ 20%

£10,000 - £1,250 = £ 8,750

£8,750 @ 20% = £1,750

The business will be taxed £1,750 in both years four and five.

Overlap relief

• Most businesses that have non-tax-year coterminous year-ends may have created Overlap profits when trading commenced, or when the CYB was introduced in 1996-97.
• Overlap profits are deducted in the transitional year 2023-24.
• If not used in 2023-24 it will be lost forever.
• The transitional year rules calculate a taxable profit as:
  • Profits of the accounting period ending in the tax year (CYB),
  • Plus: The profits arising from the day after that accounting period year-end until 5 April 2024, 
  • Less: Any Overlap profits.

Calculation of Overlap profits

HMRC have advised that they can provide overlap figures to taxpayers where they are held on HMRC systems. 

Requests can be made:

• Using HMRC's 'Get your overlap profits' facility.
• Using the Agent Dedicated Phoneline for tax agents.
• The HMRC Self Assessment helpline for taxpayers.

Transition losses from overlap relief

Where due to the deduction of brought forward overlap relief

• A trading loss is created for 2023-24 where there would otherwise have been profit, or
• An existing loss for 2023-24 has been increased due to the relief

the Terminal loss relief provisions will apply to that part of the loss created by the overlap relief, as if the trader had ceased to trade on 5 April 2024.

Any existing loss for 2023-24 is treated separately and will be available to relieve under the usual Loss relief rules.

Example

A business has a 31 July year-end. In the y/e 31 July 2023, it generated £5,500 of losses. After the apportionment of the y/e 31 July 2024 for period 1 August 2023 to 5 April 2024, there was £1,250 of profit. The business had £3,000 of overlap profits brought forward.

• The loss that would have ordinarily arisen in the year is £5,500.
• The transitional profit is turned into a loss with the use of overlap relief: £1,250 - £3,000 = £1,750.
• As the CYB amount is a loss of £5,500, the £1,750 cannot be offset any further in the year. It cannot be carried forward but it can be carried back three years using terminal loss relief.
• The £5,500 is an ordinary trading loss and can be carried back one year, used against other income of the year or carried forward.

Tax Year Basis from 2024-25

• Under TYB, profits taxable in the tax year will be those arising between 6 April and the following 5 April.
• Businesses that have an accounting period ending before 31 March will need to apportion their profit or losses to the relevant tax years.
  • Apportionment of profits is by the number of days or any other reasonable method.
  • The method must be consistently used by the business.
  • You may need to estimate profits/losses to file tax returns on time. Estimated figures will need to be replaced with actual figures once they are available, see below. 
• Accounting periods ending between 31 March and 4 April are deemed to end on 5 April.
  • An election to disapply this deeming rule will be available.
  • The time limit for the election is the first anniversary of the filing date of the tax year from which the election is to have an effect.
  • The election will last for five years.
• Trades commencing between 1 April and 5 April in any year will have assessable profits in that tax year of nil. The profits arising in that year will be assessable in the following tax year instead.
  • An election to disapply this deeming rule will be available.
  • The time limit for the election is the first anniversary of the filing date of the year from which the election is to have an effect.
  • The election will last for five years.

Other transitional provisions to consider

• Averaging: for farmers and market gardeners, See Averaging claims for an example of how this works in practice. 
• Cash basis: If the period from the start of the basis period for 2023-24 to 5 April 2024 is more than 12 months, the relevant maximum for the cash basis will be increased proportionately.
• Transition profits will not form part of an individual's Adjusted Net Income for the High-Income Child Benefit Charge (HICBC) and pension contributions.
• They will be included in amounts that qualify for relief such Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Social Investment tax (SITR) reliefs. 

Amending provisional figures

When it comes to amending provisional figures that have had to be used in a tax return as a result of a business having a non-5 April/31 March year end, HMRC have decided to:

• Allow provisional figures to be updated in line with the normal time limits for making amendments to returns to allow amendments to be completed while preparing the business accounts for the following tax year.

Useful guides on this topic

Accounting periods and tax basis periods
Which date do I choose? Does it matter? Can I change my accounting date?  What changes are proposed as a result of the reform of basis periods?

Averaging claims
When can profits be averaged? What trades do averaging apply to? How are averaging adjustments calculated and made?

Losses, trade losses and sideways relief
How can trade losses be utilised? What are the restrictions?

HMRC: useful links

• Get your Overlap profits figures
• Work out your Transition Profits