Basis period reform – the transition year

HMRC is changing the way it taxes the profits of sole traders and partnerships whose accounting year-end does not match the tax year (5 April). From 2024/25, all businesses will be taxed on their profits arising in the tax year itself.

The 2023/24 tax year was the 'transition year', which could mean some businesses are taxed on more than 12 months of profit in one go. Relief is available to spread this extra tax over five years, but careful cash flow planning is essential.

Understanding the transition

In the 2023/24 transition year, businesses with a non-standard year-end (e.g., 31 December) had to declare their profits for their normal accounting period, plus the 'transition part'—the profits from the end of their accounting period up to 5 April 2024. This inevitably led to an acceleration of tax liabilities, as more than a year's worth of profit was brought into charge.

Overlap relief and spreading

To mitigate this, businesses can deduct any 'overlap relief' they generated when they first started trading. The remaining transition profit can then be spread evenly over five tax years, starting from 2023/24. While this eases the immediate cash flow burden, it means these businesses will be paying tax on these transition profits for several years to come.

Changing your accounting date

Many businesses have chosen to permanently change their accounting year-end to 31 March or 5 April to align with the new rules and simplify their future reporting. If you have not changed your date, you will need to apportion profits from two different accounting periods to calculate your tax year profit in the future, which adds administrative complexity.