Basis Period reform: At a glance

2023-24 was a transitional year under the basis period reform rules. All unincorporated (self-employed) businesses were required to calculate their profit or loss arising up to 5 April 2024, regardless of their accounting end date. 

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

Basis period reform affected self-employed individuals and partnerships who did not already have a year-end between 31 March and 5 April.

• Where a business had an accounting year-end that finished on or between 31 March and 5 April, the accounts were effectively already being prepared on a 'tax year basis'. Basis period reform had no impact on such businesses.

For tax years up to 2022-23 for Self Assessment, sole traders and partners were taxed on the profits of their business accounting period that ended in that tax year. This was what is known as the Current Year Basis (CYB).

• If accounts were prepared to 30 June, the 2022-23 tax assessment would have been based on the accounts for the year ending 30 June 2022.

Under the Tax Year Basis (TYB), all unincorporated businesses are now taxed on their profit or loss arising in the tax year, regardless of their accounting end date. 

• A business with a year-end of any date from 31 March to 4 April is deemed to have a 5 April year-end.
• A business that already had a 5 April year-end did not have to make any adjustments under basis period reform.

The CYB ceased from 2024-25.

• This meant that 2023-24 was a transitional year for businesses whose year-end was not coterminous with the tax year or not deemed to be, i.e. they had a year-end earlier than 31 March. These businesses were subject to a special profit catch-up rule.
• This change did not affect property rental businesses, which should already have been using a 5 April period end for tax.

Summary of basis period reform rules by accounting period

Here is a comparison of how the basis period reform rules worked for a March 31 year-end and a 30 September year-end. 

Transitional Year 2023-24 

Businesses with accounting periods that did not end between 31 March and 5 April were transitioned into the TYB during the tax year 2023-24. 

• The tax year 2023-24, for those who did need to transition, was 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 were available to offset in full in the year. No overlap profits were 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 had anticipated profits of £12,000. There were £3,000 of overlap profits brought forward.

The profits in 2023-24 would have been calculated as follows;

NOTE 1: If either the amount from Step 3 or the amount given by Step 4 (or both) gave an amount of nil or less, the amount resulting from Step 4 was the chargeable profits for 2023-24. Otherwise, Step 5 would need to have been considered.

NOTE 2: In this example, we assume that the business continued to retain a 30 September year-end. However, many affected businesses changed their year-end to 5 April.

Calculation of overlap profits

Overlap profits:

• May have been recorded as a carried-forward figure on the Self-Employment or Partnership pages of a previous Self-Assessment tax return.
• Can be worked out based on historic profit figures in earlier returns.

If overlap profits are not included on previous tax returns or cannot be worked out, HMRC may be able to help and can be contacted in the usual ways.

Transitional profits

Where the above calculation gave rise to transition profits, this increased profit could 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 is 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 is 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.

Transition losses from overlap relief

Where the deduction of brought forward overlap relief means that:

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

the Terminal loss relief provisions applied to that part of the loss created by the overlap relief, as if the trader had ceased to trade on 5 April 2024. This allowed that part of the loss to be carried back up to three years, on a last in first out basis. Note that this treatment was optional.

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 year ending 31 July 2023, it generated £5,500 of losses. For the transitional profits calculation for the 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 are those arising between 6 April and the following 5 April.
• Businesses that have an accounting period ending before 31 March 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 is 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 lasts 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 is 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 lasts 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 was longer than 12 months, the relevant maximum for the cash basis was increased proportionately.
• Transition profits did not form part of an individual's Adjusted Net Income for the High-Income Child Benefit Charge (HICBC) and pension contributions.
• They were included in amounts that qualify for relief such as 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 relief figure
• Work out your Transition Profits