Basis Period Reform
Accountants and tax advisors need to prepare for the Basis Period Reform. This article summarises the changes from 2023/24 and outlines best practice going forward for your Self-Assessment client base.
Basis Period Reform Overview
The following applies to taxpayers subject to income tax only, not to companies, which are subject to corporation tax.
The term ‘basis period’ refers to the period of time over which a taxpayer’s taxable business profits or losses are calculated for the purpose of completing their tax return each year.
Normally a taxpayer would prepare business accounts on an annual basis using a common year-end. Popular year ends are 31 December, to coincide with the calendar year and 31 March to coincide (nearly) with the end of the UK tax year of 5 April (other year-ends are available). A taxpayer will also file an annual tax return which includes income and gains received during the UK tax year; 6 April to the following 5 April. Up until the current tax year (6 April 2023 to 5 April 2024) the tax return would have included the business profits or losses realised in the latest set of business accounts; in this way business profits were subject to tax on an accounting basis (current year basis), rather than profits earned in the tax year being subject to tax.
From the tax year beginning 6 April 2024, all taxpayers who have an active business will be subject to tax on profits earned during the tax year, regardless of when they choose to prepare their business accounts to. One relaxation is that taxpayers who previously prepared accounts to 31 March may continue to do so and will continue to be taxed on their profits to 31 March, rather than being taxed on their profits to 5 April.
Under the new rules taxpayers will need to calculate their profits to 5 April each year or 31 March if this is their normal accounting period end. Complexity exists for the 2023/24 tax year as transitional rules apply and overlap relief may be available; the rest of this article focuses on these complexities.
Summary of treatment
| Situation | Treatment |
| On-going trade with accounting year end of 5 April | No change required. |
| On-going trade with accounting year ending of 31 March or 1, 2, 3, 4 April | The profits / losses for the year to 31 March 2024 (or 1, 2, 3, 4 April 2024) will be taxed in 2023/24. The profits / losses for the year to 31 March 2025 (or 1, 2, 3, 4 April 2025) will be taxed in 2024/25 unless the company elects to use strict time apportionment. Care must be taken around overlap relief – see below. |
| On-going trade with an accounting year which does not end on 31 March or 1, 2, 3, 4 or 5 April | 2023/24 tax year is a transition year which taxes profits of the accounting period ending in 2023/24 and profits to the period ended 5 April 2024 with profits / losses calculated as set out below. 2024/25 tax year is based on a time apportionment of profits/losses for that tax year. |
| Trade commences in the tax year 2023/24 and continues after 2023/24 | 2023/24 tax year profits / losses are from commencement to 5 April 2024. |
| Trade ceases in 2023/24 | 2023/24 profits / losses are calculated using the basis period rules for the cessation of trades before the basis period reforms. |
Transitional rules in 2023/24 for Basis Period Reform
2023/24 is being used as the transitional year to bridge the period between the end of the account year reporting basis period for 2022/23 and the start of tax year reporting basis in 2024/25. Advisors aware of the transitional rules for a change of accounting period will be familiar with the principle of these new rules.
Example 1
Sharon is a hairdresser and historically has reported her sole trade income using an accounts year ended 31 December. In the 2022/23 tax year, we would have taken her accounts year ended 31 December 2022 to prepare her 2022/23 tax return (this was known as the Current Year Basis). This gave Sharon additional time to prepare her accounts, and then allowed her to defer the tax on her profits due to pushing the period January – April into the later tax year. HMRC are changing how Sharon will need to report her accounts, and the change will start with the 2023/24 tax year.
Assuming Sharon makes profits of £120,000 a year in her first two years, and makes £180,000 in all future years (she is a really good hairdresser), she started trading in January 2021 and her profit accrues equally throughout the year, historically her tax return would look like this:
Tax Return 2020/21: First year basis – tax profits made to 5 April 2021 (3/12 months)
Sole Trade (to year ended Dec 2020) – £30,000
Tax Return 2021/22: Second year basis – Tax the year ended in the tax year (31 December 2021)
Sole Trade (to year ended Dec 2021) – £120,000
Overlap relief – £30,000 (as this has been double taxed)
Tax Return 2022/23: Current year basis
Sole Trade (to year ended Sept 2022) – £120,000
Sharon is unable to utilise the overlap relief until she ceases to trade or changes her accounting date closer to 5 April. Therefore, we have carried forward her overlap relief. Now we consider the transitional rules for 2023/24 to get ready for the tax year basis period, noting in the year ended 31 December 2023 her profits increase to £180,000.
| Calculation | |
| Profits to Year-end 31 December 2023 | £180,000 |
| Profits Period 1 January 2024 to 31 March 2024 | £45,000 |
| Total | £225,000 |
| Less: overlap profits brought forward | (£30,000) |
| Taxable profits | £195,000 |
Under the current year basis rules, the taxable profits for the 2023/24 tax year would be £180,000, yet the transitional rules will increase her taxable profits up to £195,000 for 2023/24. Given Sharon is now being assessed on more profit than she made in the ‘accounting year’, the excess profits of £15,000 (£195,000 less £180,000) can be spread across five tax years, from 2023/24 to 2027/28.
Important point – 2023/24 is the final year to utilise historic overlap relief. Overlap relief is first set against the transitional profits, and then against the standard profit from the current year basis.
Tax year Basis from 2024/25 Onwards
From 2024/25 tax year onwards the sole trader/business/LLP is taxed on the profits arising in the tax year to 5 April. Where an accounting period does not coincide with a tax year the trader will need to apportion the profits or losses of the accounting period to the relevant tax years. The apportionment should be done by days, but HMRC will accept alternatives if the basis of time apportionment is reasonable and applied consistently. There may be circumstances in which a more accurate measure of profit or loss arising in any period can be obtained by reference to the actual transactions which took place during that period. Also, this apportionment may be prudent for seasonal businesses in the first year.
Example
A sole trader starts their business on 1 January 2025 and makes up accounts to 31 December. The year to 31 December 2025 shows a loss of £20,000. Further, the year to 31 December 2026 shows a profit of £60,000. This leaves apportioning profits on a number of days basis for the following tax years are as follows:
| Tax Year | Date | Calculation | Answer |
| 2024/25 | 1 January 2025 – 5 April 2025 | £(20,000) x 95/365 | £(5,205) |
| 2025/26 | 6 April 2025 – 31 December 2025 | £(20,000) x 270/365 | £(14,795) |
| 2025/26 | 1 January 2026 – 5 April 2026 | £60,000 x 95/365 | £15,616 |
| Total | £821 |
Spreading of Transitional Excess Profits
Transitional Excess Profits are profits over and above the profits that would have been taxed had the current year basis continued. The taxpayer has the opportunity to spread the excess over five tax years starting in 2023/24 taxing 20% of the transition profits each year. If the trade winds up before the five-year period has ended the balance of the transition profits are taxed in the final year. Further, the taxpayer can elect for an additional amount of the transitional profits to be treated as arising in a specific tax year if other factors mean it could be beneficial (for example, in an unexpected loss-making year).
Spread transitional profits are not expected to impact other profit based charges such as HICBC and tax free childcare but will impact marriage allowance claims and pension thresholds. Care should be taken in these cases.
Late Accounting Date Rules
In respect of ongoing trades which have accounting periods ending on 31 March or between and including 1 – 4 April, the profits/ losses from the day after the end of the accounting date to the following 5 April will be treated as nil and instead are deemed to occur in the following tax year. For example, a trade which has a 31 March 2025 year end will be taxed on the profits for the year to 31 March 2025 in the 2025/26 tax year.
Additionally, the late accounting date rules also apply on the commencement of a business such that if a business starts to carry on a trade on or after 31 March and does not cease trading, the profits and losses of the period from the start date to 5 April in that tax year are treated as being nil. Thus, they are instead included in the profits or losses of the following tax year.
However, these rules do not apply for the tax year of cessation. For example, if the accounts year is 31 March and the cessation of the trade is 3 April the profits of the three days 1 – 3 April are taxed in the year of cessation and not the following year.
It is also important to consider that the taxpayer can elect for the late accounting date rules not to apply for a tax year. So, essentially meaning the election being made on or before the first anniversary of the normal self-assessment filing date for the relevant tax year, the election will stay effective for the tax year of the election and the next four tax years or up to the tax year before any cessation i.e., winding up of business, if earlier.
Best Practices for Accountants
Clearly for those taxpayers on non-31 March to 5 April accounts year ends, there is going to be a delay in obtaining the required information to prepare the tax return for the year ended 2023/24 onward. Where suitable for the client, we would recommend harmonising the year end with the tax year end. We appreciate that this will change filing deadlines for some clients, but the time saving for the accountant on the tax return side of things should more than make up for a ‘busy season’ on accounts filing.
It is also important to note that 2023/24 is the last year where your client can use their overlap relief. If you do not have records of your clients overlap relief, HMRC is going to be releasing a ‘G-Form’ where you can contact HMRC to obtain details of any unused overlap relief available.
Further Queries
Please feel free to reach out to your usual contact at K3 Tax Advisory for further advice and information.
