Hi

 If you trade as a sole trader, freelancer or partnership and your accounting year doesn’t end on April 5 or March 31 this email affects you.

Changes to the way that tax is assessed, known as Basis Period Reform, will affect sole traders, freelancers and partnerships whose accounting years don’t end on April 5 or March 31. 

HMRC says that about a third of partnerships are believed to be affected, and that it will also affect around seven per cent of sole traders such as hairdressers, sign language interpreters and taxi drivers.

From April 2024, they’ll have to report their taxable profits to HMRC up until April 5 (known as the tax year basis), even if their accounting year ends at a different time. 

Previously, up to 5 April 2023, tax was assessed on what is known as the accounts year basis.This means you reported profits according to your business accounting year end date within the relevant tax year (between 31 March to 5 April the following year).

For example, if your accounting year end date was 31 December 2022, you will have reported profits on your 2022 to 2023 return for the whole year (1 January 2022 to 31 December 2022).

From 6 April 2023, the new tax year basis applies. This means you will need to report profit up to the tax year end, even if your accounting year ends at a different time.

If your accounting year end is not on or between 31 March to 5 April, your profits may need to be apportioned between accounting periods.

Apportionment is the way you work out your profits for a tax year by splitting profits from more than one set of accounts.

The 2023 to 2024 tax year is known as the ‘transition year’.

In your Self Assessment tax return, you will need to report profit from the day after your accounting year end in 2022 to 2023, up to 5 April 2024. This means you:

• will report profits covering more than one year
• may need to apportion two sets of accounts to estimate your profits for the year

For example, if you have an accounting year end date of 31 December 2022, you will report profit from 1 January 2023 to 5 April 2024 in the 2023 to 2024 tax year.

If you report profit covering more than 12 months, the excess is known as ‘transition profit’. This can be reduced by Overlap Relief and any remaining profit will be spread over the following years, up to the tax year 2027 to 2028.

Your Overlap Relief figure may already be entered as Overlap Profit Carried Forward on a previous Self Assessment return form if it included :

• trading income on Self Employment (SA103)
• trading income on Partnership (SA104)
• both trading income on Self Employment and Partnership

If you do not know your Overlap Relief figure, and you cannot find it on your previous Self Assessment returns, HMRC may be able to help.

This service can only provide an Overlap Relief figure if this information has been provided in a previous tax return. If this information has not been provided the service may be able to provide historic profit figures to allow Overlap Relief to be recalculated.

To access your Overlap Relief  figure you’ll need to sign in with your Government Gateway user ID and password for Self Assessment.

You will need to give:

• your name
• the name or description of your business (or both)
• your business address
• your Unique Taxpayer Reference (UTR)
• details of whether your business is a sole trader or part of a partnership
• the partnership’s UTR if your business is part of a partnership
• the date your self-employed business or being a partner in a partnership began (if not sure, the tax year this began)
• the most recent period of account or basis period used by your business
• the year or years the accounting period changed (if applicable)

You will be asked for contact details and whether you would like to receive a response by letter or email. After you have requested your Overlap Relief figure HMRC will send you a confirmation letter or email with your submission reference.

You will then need to complete the following steps.

1. Get your Overlap Relief figure.
2. Work out your transition profit.
3. Include your overall transition profit and Overlap Relief in your 2023 to 2024 Self Assessment tax return.

HMRC has promised to publish guidance soon on how to work out your transition profit and how to include this in your Self Assessment tax return.

If your business accounting year ends on or between 31 March to 4 April, you can treat your accounting year as if it ends on 5 April. This means you can report those profits without apportioning for the 5 days after 31 March.

Reporting profit from 5 April 2024

From 5 April 2024, you need to report the profits you earned during the tax year the return relates to (6 April to the following 5 April).

If you have an accounting year end date that is between 31 March and 5 April, put the figures from these accounts in your return as normal.

If not, you need to report parts of the profit from two sets of accounts. This means adding together profit from:

• 6 April up to your business account year end date
• the start of your new business year to 5 April the following year

For example, if you have an accounting year end date of 31 December, you will report profit from both:

• 6 April 2024 to 31 December 2024
• 1 January 2025 to 5 April 2025

The normal method of apportioning profits is by looking at the number of days in each of the periods in the tax year. You can use another method if it is reasonable, and you use it consistently. For example, you can apportion by months or weeks.

The Financial Times reports that the change has not been widely publicised, so businesses without tax advisors may simply not know of the new rule. 

A significant proportion of these taxpayers file their own Self-Assessment tax returns and may be unaware of the changes; if they are likely to affect you, we recommend that you contact your accountant, bookkeeper or another tax professional as soon as possible.

Noel Guilford