Basis Period Reform Help Sheet
This relates solely to unincorporated businesses (sole traders/partnerships) that are or have been subject to income tax. If you are a Limited Company, you will continue to be taxed as per normal and do not need to align your trading year to the 05 April 2024.
If your year-end has always ceased on the 31 March or the 05 April, this does not apply to you either.
This reform has been introduced to bring those trading years ending on a different date; in line with the 05 April in readiness for ITSA MTD to be introduced.
When you commenced self-employment, you would have chosen your year end, if this year-end did not fall between the 31 March or the 05 April then you would have fallen under the basis period rules. The ‘current year’ basis for accounting dates that end within the tax year 06 April 2023 and 05 April 2024 are being extended. All unincorporated businesses will, as from 06 April 2024 be taxed on the same basis period of 06 April 2024 to 05 April 2025 and so on.
You may ask, do I really need to change my year end? You do not, however if a business has a year-end other than the 31 March or the 05 April, they will need to identify and allocate the relevant proportion of profits into the tax year based on each set of accounts produced.
We would highly recommend that all businesses for simplicity, should align their year-end with either the 31 March or the 05 April each year to save themselves additional work moving forwards.
The Transitional Year:
So, looking at the tax year 2023-24, if you have a year end of 31 July 2023 taxable profits will need to be considered on this tax return as follows (this creating a longer than 12-month period of profits)
365 days to 31 July 2023 | Profit for the Current Year Basis |
248 days from 01 August 2023 to 05 April 2024 | Profit to be included (deemed to be the transitional period) |
You may state that you do not know what the profits are for the transitional period, then in this case you need to make your ‘best estimate’ and then resubmit an amended return once the actual profits are known. Be careful if you underestimate substantially then HMRC can investigate and issue potential penalties and interest.
To help with this additional tax burden, HMRC have said you can deduct any overlap relief (if you have any) from the transitional period and spread any remaining transitional profits over the next 5 years by applying 20% of the transitional period profits in the year to 2023/24, with the remaining 4 x 20% transitional period profits being added to each subsequent tax return from 2024/25 onwards – this is called spreading the cost.
If you cease to trade during this 5-year period, then all remaining transitional profits that have not yet been taxed, will be charged in the year of cessation.
Any losses in the transitional period, will automatically be set against the Current Year Basis period and vice versa if the loss occurs in the Current Year Basis period.
If your overlap relief results in a loss in 2023-24 – or increases an existing loss, an extended carry back is available. Effectively you can apply the terminal loss relief rules.
– only on the overlap relief loss - which will allow you to carry back the losses for up to three years on a last in first out basis.
What if you do not know if you have overlap relief available? The simplest way to find out what overlap relief you are entitled too is to use the dedicated online form (link below)
Further thoughts:
Capital Allowance calculations will still be calculated as per normal – however capital gains tax rates will not be affected by the existence of transitional profits – instead a standalone tax charge will apply to the transitional profits only.
Personal Allowance Tapering for those earning more than £100,000 – the transitional profits are excluded from the adjusted net income when calculating the tax due.
Student loans will be affected as income will have been increased in this tax period.
Tax Credits – only standard profits will be included when calculating the awards, transition part profits will not be included or need reporting.
High Income Child Benefit Charge –transitional profits should not be included in the calculation.
Pensions : transition profits will count towards relevant UK earnings for the purposes of tax relief on pension contributions.
National insurance – Class 4 – will include the transitional profits.
For property rental businesses there is no spreading of profits, all profits will be taxed in the year to 23/24.
There will be no restrictions on changing your accounting date during the transitional year of 23/24.
Working Example:
Flora the Florist commenced in business on 01 January 2019, and made up her first accounts to the 30 April 2020 (16-month trading period), her profit for the period, adjusted for taxation was £33,000.
First Tax Year is 2018/19
(period to 05 April 2019) = Total profits £33,000 x 3/16 = £6,188
Second Tax Year is 2019/20
(period 06 April 2019 to 05 April 2020) = Total profits £33,000 x 12/16 = £24,750
Third Tax Year is 2020/21
(period 01 May 2019 to 30 April 2020) = Total profits £33,000 x 12/16 = £24,750
Total profits declared on Tax Returns as follows:
Tax Year | Taxable Income |
2018/19 | £ 6,188 |
2019/20 | £24,750 |
2020/22 (CYB) | £24,750 |
Total | £55,688 |
Less Actual Profits | £33,000 |
Overlap Profits to be carried forward | £22,688 |
Transitional Year 2023/24 Tax Return
Profits for 12-month period (CYB) ending 30 April 2023 = £45,000
Estimated Profits for 11 months period ending 05 April 2024 = £50,000
Total Profits for the Transitional Period:
Tax Year | Taxable Income |
2023/24 | £45,000 |
|
|
2023/24 transitional profits | £50,000 |
Less Overlap Relief | (£22,688) |
Total transitional profits | £27,312 |
20% of transitional profits to be added | £5,462 |
|
|
Total taxable profits on 2023/24 tax return: | £45,000 + £5,462 = £50,462 |
Additional £5,462 profits to be added to tax returns as follows (provided the business does not cease to trade during these periods):
2024/25
2025/26
2026/27
2027/28
How this would work in Capium
Short RETURN SA100
You cannot use the SA100 Short Return
if your business is more complicated or your turnover for the year is £85,000 or more
you are using overlap relief
you have unused overlap relief which you need to use due to basis period reform – the 2023 to 2024 tax year is the final year you can use the overlap relief
your taxable self-employed period, known as the basis period is not the same as your accounting period and you are affected by basis period reform
You have adjustment income because you are changing your accounting basis
Your business ceased before 06 April 2024 and overlap relief is due
You need to adjust any profits chargeable to class 4 national insurance contributions
You were within the Managing Serious Defaulters (MSD) programme during the year
FULL SA100
Box 68 If your basis period is not the same as your accounting period : you may have to add together the amounts of your accounting periods or apportion the total to work out your profit or loss for your basis period, put any adjustments to your profit (box 64) or loss (box 65) in box 68, do not include any transitional profit or loss in this box.
Box 69 Overlap relief not previously deducted on a change of accounting date: You can use overlap relief if you have overlap profits and you:
Sold or closed down your business during the 2023 to 2024 tax year and your basis period this year does not start on 06 April.
Changed your accounting date in a previous tax year and did not deduct any overlap relief that you should have done at that time.
If you have a transition part profit or loss as a result of basis period reform then use box 73.2 (and not box 69) to deduct your overlap relief
Box 71 – Adjustment for change of accounting practice
If you have worked out your profit using:
Traditional accounting this year
Cash basis last year
You will have a positive transitional adjustment, including the amount of adjustment that is taxable this year, you need to include any adjusted profit in box 73.
Box 73.1 – profit or loss of the transition part of the basis period
Due to basis period reform for the 2023 to 2024 tax year the basis period will be made up of different components depending on when your previous basis period ended.
The first of those components is the standard part which is the first 12 months beginning immediately after the end of your basis period for the 2022 to 2023 tax year.
If this standard part ends before 31 March 2024 then you will have a transition part, which begins immediately after the standard part ends and runs until 5 April 2024, or until your accounting date if this is between 31 March and 4 April 2024 then the amount of profit or loss for this period should be entered in box 73.1.
If you have a transition part loss you should deduct this amount from your standard part profit when calculating your total taxable profits at box 76.
If you also have a loss from your standard part, or your transition part loss is more than your standard part profit, the sum of both figures becomes your adjusted loss at box 77
Box 73.2 Overlap relief used on the transition part of the basis period this year If you have any previously unused overlap relief and a transition part profit or loss in the year you must use your overlap relief against your transition part profit or loss.
After the 2023 to 2024 tax year overlap relief will not be available and any unused relief will be lost. If you have unused overlap relief but no transition part profit or loss, use box 69 to use your unused overlap relief.
Box 73.3 Spread of the transition profit treated as arising in this tax year If you have transition profits (after overlap relief) for the 2023 to 2024 tax year, these profits will be spread over the next 5 years.
Calculate box 73.1 less box 73.2. Enter 20% of this amount in box 73.3. This will increase your chargeable profits in the year by this amount. You can elect to accelerate the amount of transition profits charged to tax in any one year and this will proportionately reduce amounts due to be charged in later years.
If you wish to accelerate transition profits enter the full amount of transition profits chargeable in the year (20% + accelerated amount) in box 73.3 and the full details of your election including the amount accelerated in box 103 ‘Any other information’.
Box 73.4 Loss brought forward from earlier years set off against this year’s spread of the transition profit (up to the amount in box 73.3) If you have any losses of the business brought forward from earlier years, you can set these against your transition profits up to the amount in box 73.3.
If your loss brought forward exceeds your transition profits, the remaining amount is available to use against your standard part profit, or to be carried forward if you have no standard part profit. If you have used all your losses brought forward against your transition profits you cannot set them against your standard part profit. If you have a loss in the transition year you may be able to carry it back for 3 years.
Box 74 Loss brought forward from earlier years set off against this year’s adjusted profit
If you have any losses of the business brought forward from earlier years, you can set these against this year’s profit up to the amount in box 73.
If your loss brought forward exceeds your standard profit, the remaining amount is available to use against your transition profit or to be carried forward if you have no transition profit. If you have used all your losses brought forward against your standard profit you cannot set them against your transition profit.
Box 75 Any other business income not included in boxes 15, 16 or 60 This includes any other business income which is not trading income.
Box 77 – Adjusted loss for 2023 to 2024
If you have a loss put the figure in box 77, if you have no adjustment to make put the same figure you used in box 65 in box 77
Box 78 Only include a loss for this tax year in box 78
If the loss is more than your other income (or your other income is NIL) put your income amount (or NIL) in box 78, you can claim the balance of your loss against any capital gains for 2023 to 2024 or fill in box 79 or 80.
Do not fill in box 78 if you use cash basis or claim trading income allowance
Box 103 – enter the details of your election to accelerate transitional profits.
Put an X in box 100 if you want to pay Class 2 NIC voluntarily, if you have multiple self-employments then just do this once.
You will not be able to pay class 2 NIC voluntarily through self-assessment after 31 January 2025.
Additional notes & comments
a.
Box 64 you should not include any transitional profits or loss in this box
The transitional profits should be entered into box 73.1 and overlap being claimed in 73.2 – with the spread in 73.3
Box 76 must not include box 73.3 which is the spread of the profits of the transitional period.
This is so that the SA302 shows the taxable income – taxed as normal – in box 76
The transitional profits (spread) is then added as a separate entry below the computation and taxed at the appropriate taxation rate depending on the level of normal profit from self-employment
After which the NI is worked out
Please note if the total taxable profits (in box 76) do not generate a tax charge, and does not use up all of the personal allowance along with the transitional profits (spread) to be considered then no additional line will appear on the SA302 computation as there is no tax due.
b. If the full profit for say a period longer than 12 months, is put into the tax return, into box 64, there should be an adjustment made to box 68 (a minus figure to remove the transitional profits (which relates solely to the profit or loss of the transition period of the basis period only) to remove the transitional period profit or loss, this will then correct the box 76 figure.
The transitional profits should then be added to box 73.1 and the overlap relief to box 73.2 – allowing the spread to take place of just these profits in box 73.3.
c.
If the books are being made up for the ‘longer than 12 month period’ to the 05 April 2024, if this is the case then:
Box 8 Start date of the accounting period
Box 9 Would be the 05 April 2024
This would mean there would need to be an adjustment in box 68 for the transitional period if you are going to adjust the profit, remove the overlap relief and spread, if you are going to pay all the taxation due then no adjustment and no spreading required.
Box 66 and 67 – you pay tax on the profits of your basis period for the tax year, so if there is no spreading or adjustment, then it would be the same as for box 8 and box 9.
Your accounting period can be different to your basis period, you would then need to add together the amounts of your account periods or apportion the total to work out your profit and loss for your basis period put any adjustment to your profit (box 64) or loss (box 65) in box 68, you should not include any transition profit or loss in this box
d.
Year 01/11/22 to 31/12/23
Income £33,970 Box 1
Expenses £6,066 Box 31
Profit £27,904. Box 47 and Box 64 – also showing in Box 73 and box 76
Transitional period 01/01/24 to 31/03/24
Income £7,742
Expenses £1,767
Profit £6,975 Box 73.1 and if no overlap relief and want to pay all taxes now Box 73.3
Box 76 will only reflect Box 64’s amounts and should not include Box 73.3 figure – this box 73.3 figure is shown on the SA302 but later in the calculation.
If all or more than 20% of the transitional profits are being declared in this period then you also need to give further information in box 103.