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Basis Period Reform - FAQs

11 January, 2024

Last updated 14 February 2024

Basis period reform represents a major change in how the trading profits of unincorporated businesses (such as sole traders and members of partnerships) are calculated for income tax purposes.

These FAQs are designed to help tax agents navigate the practicalities of this change. They are not intended to be comprehensive guidance or to cover all aspects of basis period reform. Specific advice should always be sought where needed.

More information on basis period reform can be found in the relevant legislation (Sch 1, Finance Act 2022) and HMRC’s Business Income Manual (BIM81200 onwards).

Please use the menu below to navigate these FAQs.

 

Basis period reform basics

What is changing and when?

From 6 April 2024, a new ‘tax year basis’ of assessment will apply to the trading profits of unincorporated businesses, such as sole traders and partners subject to income tax.  Under the tax year basis, such businesses will be taxed on the profits arising in each tax year (6 April to the following 5 April), regardless of their accounting period end date.

This will replace the ‘current year’ basis, under which the tax for any one tax year is calculated using the profits of the accounting period ending in that year.  Basis period reform therefore effectively breaks the link between the accounting date chosen by a business and when they are taxed on their profits.

The tax year 2023/24 represents a transitional year, in which we switch over from the current year basis of assessment to this new tax year basis.

Who is (and isn’t) affected?

Only trading businesses subject to income tax are affected by basis period reform– i.e. sole traders and individual partners in a partnership. Companies are not affected and remain subject to the corporation tax rules.

Any business already drawing their accounts up to 31 March or 5 April (or any date in between) will also be unaffected. For the purposes of the tax year basis, 31 March is deemed to be the same as 5 April, so if you have a 31 March year end you can treat your accounting period as the same as the tax year.

Property income is already reported on a tax year basis and should therefore not be affected by the change. However, the rules which deem 31 March to be the equivalent of 5 April will also apply to property income from 2023/24 onwards.

How will the tax year basis work?

Under the tax year basis, businesses will be subject to tax on their profits arising in the tax year (i.e. from 6 April to the following 5 April). As noted above, if a business already draws accounts up to 31 March or 5 April (or any date in between) then this will be treated as the same as the tax year.

If a business has a year-end other than 31 March or 5 April (or any date in between), they will need to apportion amounts from two sets of accounts to calculate their profits for every tax year from 2024/25 onwards (see below). Note that it is not the actual transactions arising in the tax year which are taxed, but rather the relevant proportion of the profit (or loss) based on each set of accounts.

Does this mean accounts have to be drawn up to 31 March or 5 April?

No – businesses remain free to draw up their accounts to any date they wish.

However, if they choose a date other than 31 March or 5 April, they will have additional work to do each time the trader / partner comes to prepare their self-assessment return (see below). Many businesses will therefore find it simpler to adopt a 31 March or 5 April year end.

Are payment and/or filing dates changing under basis period reform?

No.

Filing deadlines for income tax self-assessment returns remain the same (i.e. 31 January following the end of the tax year) and there is no change to the frequency or dates for tax payments.

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Calculating profits under the tax year basis

How is apportionment carried out?

Under the tax year basis, if a business does not draw their accounts to 31 March or 5 April (or a date in between) they will need to time apportion amounts from two sets of accounts to calculate their taxable profits each year.

The default is that this apportionment is carried out on a day basis.  For example, for the tax year 2024/25, a business with a 31 December year-end will need to apportion:

  • 270 days from the year ended 31 December 2024; and
  • 95 days from the year ended 31 December 2025.

However, a different time-apportionment (for example weeks or months) can be used provided it is reasonable and applied consistently.

In all cases, the figures to be apportioned are the tax adjusted profit / loss - i.e. after adjusting for non-deductible expenses and capital allowances.

What if my accounts aren’t ready in time?

Depending on the accounting date used by a business, the second set of accounts may not be finalised by the time the relevant self-assessment return has to be filed.

For example, as set out above, for 2024-25 a business with a 31 December year-end will need to apportion:

  • 270 days from the year ended 31 December 2024; and
  • 95 days from the year ended 31 December 2025.

However, it’s highly unlikely the accounts for the year ended 31 December 2025 will be ready by the 31 January 2026 filing deadline for the 2024/25 return.

Where this is the case, businesses will need to estimate the figure from the second set of accounts and file a provisional figure in their return. That provisional figure will subsequently need to be corrected (see below).

HMRC do not dictate how the provisional figure should be calculated, and the level of detail involved in estimating it will depend upon the nature of the business, its size and complexity. However, businesses should ensure their estimate is reasonable, or interest and penalties could arise. They should also keep a record of how they came to the figure used.

HMRC’s Self-Assessment manual contains wider guidance on the use of provisional figures in tax returns at SALF206.

How do I correct provisional figures?

Provisional figures are corrected by amending the original return.

Generally, where a provisional figure is included in a return, it should be corrected without delay once the final figure is known.

However, HMRC have indicated they will amend their guidance, and allow provisional figures used as a result of basis period reform to be corrected at any time up to the normal amendment deadline. For example, for tax year 2024/25, a business will have until 31 January 2027 to correct a provisional figure.

This should allow agents and businesses to file the amended return at the same time as preparing the following year’s return.

What are the consequences of using provisional figures?

The correction of a provisional figure is made via an amendment to the return.

As a result, the usual provisions relating to amendments will apply.  In particular, the enquiry window will be extended, though only in respect of the amended figure, and not the wider return.

A business that amends its returns on a regular basis could be considered higher risk by HMRC, though it is hoped that this will not be the case where this is purely a result of basis period reform.

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The transitional year - 2023/24

Which profits are taxed in 2023/24?

Tax year 2023/24 is a transitional year, in which we swap over from the current year basis to the new tax year basis. Specific rules apply in the transitional year, which may result in more than 12 months’ worth of profit being taxed.

In summary, in 2023/24 businesses will be taxed on the profits of:

  • The 12 months starting with the end of the basis period for 2022/23 (the ‘standard part’); and
  • The period from the end of the standard part to 5 April 2024 (the ‘transition part’)

For most businesses, the standard part will effectively be the profits they would have brought into account under the current year basis. The transition part will then bring them from the end of that period up to 5 April 2024.

For example, a business with a 31 December year-end will be taxed on the profits of:

  • the year ended 31 December 2023 (the ‘standard part profits’); and
  • the period from 1 January to 5 April 2024 (the ‘transition part profits’).

To calculate the transition part profits, the results of the year ending 31 December 2024 will need to be time apportioned (see below).

To alleviate the tax impact of additional profits brought into account, taxpayers can:

  • Deduct any overlap relief (see below) from their transition part profits; and
  • Spread any remaining ‘transition profits’ over up to five years (see below).

What if there is a loss in 2023/24?

Any loss arising in the transition part will be automatically set against the standard part profits, and vice versa. If a loss arises in both the transition part and standard part, these losses are combined for the purposes of calculating the overall loss for 2023/24.

Regardless of whether or not there is a loss, overlap relief should still be deducted in full in 2023/24. Where this increases or creates a loss, special extended carry back provisions apply (see below). However, spreading may not be available (see below).

HMRC’s guidance at BIM81290 includes a number of examples illustrating how losses in the standard part and/or transition part will be dealt with.

How is the tax on transition profits calculated?

Special rules apply to calculate the tax on any transition part profits.

These modify the normal income tax calculation in s23 ITA 2007, such that the transition profits are treated as a separate component of total income:

  • Transition profits are relieved as normal under Step 2.
  • Any transition profits remaining are then removed from net income.
  • A standalone amount of tax is calculated on them and added back in at Step 4.

The standalone tax added back at Step 4 is the difference between:

  • The tax that would have been payable if the transition profits had been left in net income; and
  • The tax that would have been payable if they were removed from net income.

Calculating tax in this way allows the personal allowance and other reliefs to be set against transition profits in step 2. It also allows the tax reducers in s26 ITA 2007 (such as EIS, SEIS and VCT reliefs and double taxation relief) to be set against the tax arising on the transition profits.

Removing the transition profits from net income also reduces the impact on some (but not all) other reliefs and allowances (see below).

What if I start trading in 2023/24?

Businesses which start trading in 2023/24, and do not cease to trade in that tax year, will be taxed on their profits from their date of commencement to 5 April 2024.

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Overlap relief

What overlap relief can I offset?

Businesses must offset all overlap relief they are entitled to in 2023/24.  If they do not, they will not have a further opportunity to do so in the future, and all entitlement to overlap relief will be lost.

Overlap relief may have arisen when the business started to trade (when the current year basis meant they may have been taxed twice on the same profits) or from a past change in accounting date. If the business is old enough, it may also have transitional overlap relief available from the switch over to the current year basis in 1996/97.

The amount which can be deducted in 2023/24 is the amount that would have been deductible had the business ceased that year. Relief can also be claimed for any overlap relief which could have been deducted in a previous year when there was a change in accounting period but was not claimed for any reason.

What if my overlap relief results in a loss?

If deducting overlap relief creates a loss in 2023-24, or increases an existing loss, an extended carry back is available.

Effectively, the business can apply the terminal loss relief rules as if they had ceased to trade on 5 April 2024. This allows the loss to be carried back up to three years, on a last in first out basis.

However, only that part of the loss which arises from deducting overlap relief qualifies for this extended carry back. Any other remaining loss can be relieved using the normal loss relief rules.

HMRC’s guidance at BIM81300 includes a number of worked examples to illustrate the operation of the extended carry back.

How can I find out my overlap relief figure?

If a business does not know what overlap relief they are entitled to, they can request this information from HMRC.

The easiest way to do this is to use the dedicated online g-form. Businesses will need to sign in with the Government Gateway user ID and password they use for self-assessment. They will also need to provide certain details, including their UTR, the date or tax year in which they started to trade and details of any previous changes in accounting period.

Once the g-form has been completed, HMRC should be in touch within 15 working days (though this may be longer for complex cases). If the overlap relief figure was previously reported on a tax return, HMRC will provide the figure reported. Otherwise, they will provide the relevant tax return figures to enable the business to calculate the overlap relief themselves.

If a business is unable to use the g-form, overlap relief details can also be requested over the telephone. However, the g-form will be the quickest route to receiving an answer, and should therefore be used wherever possible.

In all events, the amounts entered onto the 2023-24 tax return in respect of overlap relief are a self-assessment. Businesses should therefore be comfortable that the amount of relief they claim is reasonable, and as accurate as possible.

Can agents use the HMRC overlap relief g-form?

Yes.

Agents should log in to the g-form service using their Agent Services Account (ASA) or Online Services for Agents Account details.

Although requests can be made for multiple clients, a separate g-form must be completed for each.

If you are representing a partnership, a separate form must be completed for each partner.

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Spreading

When can I spread excess profits?

Spreading is a method of alleviating the tax impact of additional profits being brought into account as a result of the basis period reform transitional rules.

As set out above, overlap relief should be deducted from any transition part profits in 2023/24.  Any remaining additional profits after this are referred to as transition profits, and can be spread over up to five tax years.

However, there will be some instances where spreading is not available, including:

  • Where deducting overlap relief from the transition part profits results in a loss; and
  • Where there is an overall loss for 2023/24 (taking the standard part, transition part and overlap relief into account).

How does spreading work?

The default is that 20% of the transition profits should be brought into account in 2023/24, and a further 20% in each of the following four tax years.

However, it is possible to elect to accelerate the amount of transition profits brought into account in any one tax year. The business can choose any additional amount to bring into account. Any remaining transition profits will then be spread equally over the remaining spreading period (subject to any further election in one of those years).

This ability to accelerate the amount of transition profits brought into account may be particularly useful if a taxpayer is subject to a lower level of tax than usual in any tax year (for example because they have a large expense or lower income that year).

This election must be made on the self-assessment return, and the deadline is one year after the filing date for that return.

HMRC’s guidance at BIM81310 includes a number of examples on spreading, including where an election is made to accelerate spreading.

What happens if the trade ceases whilst spreading?

If a business ceases to trade during the spreading period, any remaining transition profits will be brought into account in full in the tax year of cessation.

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Interaction with other reliefs, allowances etc.

Will basis period reform affect capital allowances calculations?

No.

Capital allowances will still be calculated on an accounting period by accounting period basis. It is the taxable profit / loss after capital allowances that is apportioned to determine the overall position for any tax year.

Can double tax relief be claimed against transition profits?

Yes.

The tax calculation for transition profits (see above) means that any of the tax reducers in s26 ITA 2007 - which includes double tax relief given by agreement and unilateral relief - can be offset.

Will personal allowance tapering take transition profits into account?

Yes.

Personal allowance tapering occurs where a taxpayer’s adjusted net income exceeds £100,000. For every £2 of net income above £100,000, £1 of the personal allowance is lost.

Transition profits are excluded from net income when calculating the tax due on them (see above). However, as this calculation requires a comparison between tax payable if transition profits were left in net income, versus that payable if they were excluded, the personal allowance taper may still be felt if transition profits take net income over £100,000.

For example, if in 2023/24 a business has standard part profits of £100,000 and transition part profits to bring into account (after spreading) of £20,000, they will effectively lose £10,000 of their personal allowance.

Will student loans be affected?

Yes.

We understand from HMRC that transition profits / losses will be taken into account when looking at both student loan repayments and household income assessments. More information on the interaction with student loans can be found in a Tax Adviser article written by Claire Thackaberry of the Low Incomes Tax Reform Group (LITRG).

How will basis period reform interact with tax credits and universal credit?

For tax credit purposes, only standard part profits will be included when calculating awards. Transition part profits should not be included when reporting earnings for the renewals process.

For universal credit, transition profits should not be included in the earnings reported to the Department for Work and Pensions (DWP) each month. However, if additional tax or National Insurance contributions are paid as a result of basis period reform, this could affect a taxpayer's universal credit.

More information is available on the Low Incomes Tax Reform Group (LITRG) website.

Will transition profits affect the HICBC?

No.

The £50,000 High Income Child Benefit Charge (HICBC) threshold is based on adjusted net income. As transition profits are excluded from net income (see above) then they should not, on their own, cause this threshold to be breached.

How will pensions be affected?

The pension annual allowance taper calculation is based on net income. As transition profits are excluded from net income (see above) they should not affect annual allowance tapering.

We understand that transition profits will however count towards relevant UK earnings for the purposes of tax relief on pension contributions.

How does basis period reform interact with farmers / creative artists averaging?

Transition profits should not be taken into account for the purposes of the averaging rules for farmers and creative artists. However, transition losses may need to be taken into account.

A technical article is available on the ATT website which explores this issue further, including worked examples.

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Partnerships

How will basis period reform work for partnerships?

If a partnership does not draw up its accounts to 31 March or 5 April, individual partners subject to income tax will be affected by basis period reform. However, corporate partners will not be affected.

We understand from HMRC that the intention is that the partnership return will not change under basis period reform and will continue to be based on the accounting period of the partnership. However, the individual partners will have to prepare their self-assessment returns on a tax year basis.

For 2023/24, each individual partner will also have to work out their transition profits, deducting their personal overlap relief figures. They will also make their own choices regarding spreading and any acceleration of spread amounts.

What about notional businesses of partnerships?

Where a partnership has a notional business (such as a rental business), the basis period for that notional business will switch to a tax year basis from 2024/25. The basis period for the notional business in 2023-24 will be the same as that for the trade.

Individual partners should deduct any overlap relief they may be entitled to in relation to the notional business in 2023/24. However, this must be deducted against the profits of the notional business first. Only once these have been reduced to nil can overlap relief for the notional business be deducted against the partner’s trading income.

Spreading is not available for any transition profits remaining in respect of the notional business after deduction of overlap relief, meaning they are taxable in full in 2023/24. This differs to trading profits, the treatment of which is explained above.

HMRC’s Business Income Manual at BIM81340 contains more information on how basis period reform will affect notional businesses, including worked examples.

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Practicalities

Can I change my accounting date to avoid basis period reform?

Changing accounting date to 31 March or 5 April (or any date in between) will reduce ongoing administrative burdens from April 2024 onwards. In particular, it will remove the need to apportion figures from more than one set of accounts, and the possibility of having to file and correct provisional figures (see above).

However, it will not remove the need to apply the transitional rules in 2023/24, or prevent additional profits being brought into account.

If the change in accounting date takes effect in 2023/24, the business may however be able to access spreading (see above).

The usual restrictions on changing accounting date in s217 ITTOIA 2005 are also disapplied from 2023/24. This means that, if it wishes, a business can draw up a set of accounts exceeding 18 months in length to effect the change. For example, if a business has a year-end of 30 April, they could change this by drawing up a single 23-month set of accounts for the period from 1 May 2022 to 31 March 2024. There is also no need to worry about having a commercial reason for the change where there has been a previous change in the last five years.

However, whether a change in accounting date is suitable or possible is also a commercial decision, and businesses will need to consider the wider pros and cons beyond tax.

How will basis period reform interact with Making Tax Digital?

Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) will be introduced from April 2026 for businesses with turnover of £50,000 or more, and from April 2027 for those turning over at least £30,000.

Taxpayers in scope of MTD ITSA will have to submit quarterly updates of their income and expenses to HMRC. These quarterly updates will align with the tax year, and not the accounting period of the business.

The introduction of the tax year basis from April 2024 may make alignment with MTD for ITSA quarters easier. However, it should be remembered that, if the business does not have a 31 March or 5 April year-end, then under the tax year basis it is not the transactions actually taking place in the tax year which are subject to tax, but rather the apportioned profits of the relevant accounting periods (see above).

It is not yet clear exactly how software will handle the transition from quarterly updates to the taxable profit for the year where a business does not have a 31 March or 5 April year-end.

More information on MTD for ITSA generally is available on the ATT website.

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