Basis Period Reform: how to complete the self assessment tax return for the 2023/24 transitional year

Basis Period Reform means that from the 2024/25 tax year, all sole traders and individual partnership members will be assessed on their tax adjusted profits for the tax year, regardless of their accounting period end date.

If you are an accountant in practice or industry and would like more information about basis period reform and you'd like to discuss becoming a 20:20 Innovation member, why not book a free 30-minute demo with our team today.

The 2023/24 tax year is transitional...

The 2023/24 tax year is known as the ‘transitional year’, in which individuals who have not previously had accounting periods that end on 31 March or 5 April will be assessed to tax on their tax-adjusted profits from the first day of the accounting period that began in the 2022/23 tax year up to 31 March or 5 April 2024.

... and will affect taxable profit for the 2023/24 tax year

This means that some individuals will be assessed and pay income tax on more than twelve months’ worth of profits, although they are entitled to deduct any overlap relief that they have available from the profits that are assessed in the 2023/24 tax year.

This article gives a brief overview of the basis period reform rules for the 2023/24 transitional year before looking at how to complete the self assessment tax return and declare the right taxable profits for those of your clients who are affected by the new basis period rules.

Individuals with 31 March or 5 April accounting year ends

For unincorporated businesses who had 31 March or 5 April accounting year ends prior to the 2023/24 tax year, the rules are straightforward: carry on as normal, declaring their taxable profit based on the results of the trade for the 12 months to the 31 March or 5 April in the 2023/24 self assessment tax return.

The complexities in the 2023/24 self assessment tax return due to basis period reform will not affect clients with 31 March or 5 April year ends.

Is there any difference between a 31 March and 5 April accounting year end?

Basis period reform allows individuals to use 31 March (or 1-4 April) as an accounting period end date without any need to adjust the profits to a tax year basis. Taxable profit will be assessed as though the accounts were prepared to 5 April. If the accounting date is 31 March, any transactions falling between 1 and 5 April should be included in the accounts for the following period.

Individuals who do not have 31 March or 5 April accounting year ends

Under basis period reform, sole traders and individual partnership members are required to declare, and pay income tax on, their tax-adjusted trading profits from the day after their accounting period that ended in the 2022/23 tax year (i.e. the start of their new accounting period) up to 31 March or 5 April 2024 (the end of the 2023/24 tax year). This means that they may pay tax on more than 12 months’ worth of profits.

Consider an example ...

For example, in the 2023/24 tax year a client with a 31 December year end will declare, and pay income tax on, the results of the trade for the 15 months from 1 January 2023 (the start of their accounting period) to 31 March or 5 April 2024 (the end of the tax year).

If the client has overlap relief available (see below), this can be deducted from their taxable profits.

Is it worth changing accounting year end date?

With basis period reform, previous restrictions on changing accounting date no longer apply from the 2023/24 tax year. There are some circumstances where it could be worth looking at a change.

Consider an accounting period ending 31 December

As with the above example, if a client has a 31 December accounting year end, the 15 months declared in the 2023/24 tax year will comprise the taxable profits of the 12 months to 31 December 2023 and 3/12 of the taxable profits from the accounts for the 12 months to 31 December 2024.

Given that the tax return filing deadline date for the 2023/24 return is 31 January 2025, it will be quite a rush to get the 31 December 2024 business accounts ready in time!

In this, and similar, situations, it is possible to use provisional figures on the self assessment tax return, but you may find it preferable for your client to change to a 31 March or 5 April year end.

In short, changing their year end date does not mean that your client will escape the transitional year rules but it may make life easier for you in the longer-term.

What are ‘transitional profits’?

In the above example the client pays income tax on 15 months’ worth of taxable profits for the 2023/24 tax year. The rules for the 2023/24 transitional year dictate that if more than 12 months’ trading results are being assessed, then the results should be split between a ‘standard component’ (the taxable profit for the 12 months from the end of the accounting period that fell in the 2022/23 tax year) and the ‘transitional component’ (the taxable profit for the remainder of the period that is being taxed).

Calculating 'transitional profits' for an accounting period ending 31 December

For the client in our example, the standard component would be the taxable profit for the 12 months to 31 December 2023. The transitional component would be the taxable profit for the 3 months to 31 March or 5 April 2024, less any available overlap relief.

The 5-year spread

These transitional profits are spread over 5 tax years, beginning in 2023/24. So for the 2023/24 tax year, our example client would pay income tax on profits for the standard component, plus 20% of the transitional component profits. In each of the next 4 tax years, 20% of the transitional component will be taxed.

It is possible for the client to elect to pay income tax on more than 20% of the transitional profits in a given tax year. When this happens, any untaxed remainder must be spread evenly over the remaining years in the original 5-year spreading period.

What happens if the business ceases trade before the 5-years have elapsed?

If the trade ceases at any point during the 5-year spreading period, all remaining transitional profits are charged to tax in the year of cessation.

How much overlap relief is available?

Overlap relief may have arisen when the trade commenced or if the trader subsequently changed their accounting date.

Where can I find details of my client's overlap relief amount?

Your client’s overlap relief may be shown as ‘overlap profit carried forward’ on a previous self assessment tax return, but if not, and you think that your client has overlap relief available, you can use HMRC’s service to gain historical information that may help you ascertain the figure.

Long versus short accounting periods

If your client has agreed to change their accounting period to 31 March or 5 April, you should consider how accounts will be prepared for the 2023/24 tax year.

Let’s say the client in our example above agreed to change their year end to 31 March. Should you prepare a set of accounts for a 15 month period ending on 31 March 2024 or should you prepare accounts for 2 shorter accounting periods, the first being 12 months to 31 December 2023 and the second being 3 months to 31 March 2024?

The answer to this question depends on several factors specific to the client, not to mention whether they are prepared to pay for 2 sets of accounts instead of one!

One of the main considerations is the timing of the client’s transactions. If the client has fluctuating profits then the decision to split a longer accounting period into 2 could affect how much is treated as the standard component and how much is treated as the transitional component and can therefore be spread over 5 years.

If your client is affected by the transitional year rules and is declaring more than 12 months of tax adjusted trading results on their 2023/24 tax return, care should be taken if an overall loss arises or if a loss arises in either the standard component or the transitional component.

The rules for using losses in the 2023/24 transitional year are complex, but it should be noted that the part of a transitional loss that is attributable to deducting overlap relief can be carried back and used against profits of the previous 3 tax years on a LIFO basis.

The 2023/24 tax return for those affected by the transitional year rules

If your client is being assessed on more than 12 months’ tax adjusted trading results in the 2023/24 tax year, they will need to complete the ‘full’ self-employment supplementary pages (SA103F) rather than the short version (SA103S).

New boxes have been added to the 2023/24 full self-employment supplementary pages that cover transitional profits, overlap relief and spreading:

Before completing the self assessment tax return, we recommend that you carefully check your workings for both the standard and transitional components.

For each accounting period ending in the 2023/24 tax year, a set of SA103F pages should be completed. The results for the latest accounting period should be entered on the SA103F pages that form part of the main return. Results for any earlier accounting periods should be entered on separate SA103F pages up to box 65 (the Proft & Loss, Balance Sheet, Capital Allowances and tax adjustment boxes only) and the pages should be attached to the main return as a pdf document. Disclosure should be made in the additional information box of the main self assessment tax return (SA100) to explain any basis period adjustments and that an attachment is included.

The way that the standard component is reported to HMRC is very odd. The results of the latest accounting period are entered in the main set of SA103F pages, so that box 47 will show the profit for the latest accounting period (or box 48, if it’s a loss):

You are then required, in new box 68 to calculate and enter the difference between the profit or loss in box 47 or 48 and the profit for the standard component. The sum of boxes 47/48 and 68 should therefore show the profit or loss for the standard part of the 2023/24 basis period. This seems quite an odd way of doing things; you need to show the profit/loss of the later accounting period in the main SA103F page, then adjust the figure to arrive at the profit/loss for an earlier accounting period!

Now for the transitional profit or loss. The transitional profit or loss, before any overlap relief is deducted, should be entered in new box 73.1. All overlap relief available should then be entered in new box 73.2. If the transitional profit exceeds any overlap relief available (box 73.1 less 73.2 is a positive figure), this can be spread over 5 years so, for 2023/24, at least 20% of the excess must be entered into new box 73.3.

It is possible to use available brought forward trading losses against the 2023/24 spread share of the transitional profits. If so, the amount used should be entered in new box 73.4. Any amount of brought forward loss to be used against profits of the standard component should be entered in box 74.

There are 3 possible scenarios for those who did not have 31 March or 5 April year ends prior to the 2023/24 tax year. All 3 scenarios assume that the trade was profitable.

1 - The trader keeps a non 31 March/5 April accounting year end

The results of the accounts for the year ending in the 2023/24 tax year should be recorded on the SA103F pages. As the trader has not changed accounting date, a portion of the profits for the next 12 month accounting period should be entered as transitional profits in box 73.2.

If the tax adjusted results for this accounting period have been finalised at the time the tax return is being prepared, these documents can be attached to the return and a note made in the additional information box.

If the accounts have not been finalised, a provisional figure can be used as long as it is disclosed accordingly. When the actual results are known, the return should be amended within 12 months of the filing deadline.

Effectively, this means the return can be amended when the next year’s self assessment return is being submitted, but note that this extended window for confirming provisional figures only applies in the case of adjustments due to basis period reform.

2 – The trader changes to a 31 March/5 April accounting period end, with 2 shorter accounting periods being assessed in the 2023/24 tax year

In this situation it’s important to have your workings for the standard and transitional components to hand. The tax-adjusted results for the later, shorter accounting period are to be entered on the main SA103F pages, then in box 68 you should enter the figure required to achieve the standard component profit or loss than you have calculated separately.

The transitional profit/loss and any overlap relief available should be entered into boxes 73.1 and 73.2 respectively.

The tax-adjusted results for the earlier accounting period should be entered on separate SA103F pages and attached to the return as a pdf document.

3 - The trader changes to a 31 March/5 April accounting period end, with a long accounting period being assessed in the 2023/24 tax year

In this situation, the self assessment tax return is more straightforward in that the tax-adjusted results for the full accounting period are shown in just one set of SA103F pages.

Using your workings, you should enter the appropriate figures in boxes 68, 73.1 and 73.2 to show the standard profit/loss, transitional profit/loss and overlap relief being used. No attachments are required.

What about the partnership return?

So far, we’ve covered how to complete the 2023/24 self assessment tax return for sole traders subject to basis period adjustments. Similar principles apply to individuals who are members of partnerships.

It’s important to note that no basis period adjustments are required in the partnership return (SA800) itself; only the partnership supplementary pages (SA104F) of the individual partners.

Partners with non 31 March/5 April accounting year ends will need to use the full partnership supplementary pages (SA104F) rather than the short version (SA104S). Whilst the box numbers are different, the new SA104F boxes require the same information as the new boxes in the SA103F. Partners could fall into any of the 3 scenarios set out above, and the return should be completed accordingly.

An additional consideration for partners may arise if the partnership has a notional business, such as property letting. The profits of the notional business are also subject to the transitional rules in 2023/24 and there are special rules that dictate how overlap profits for the notional business must be used.

Useful guidance

20:20 Innovation members have a range of resources to help deal with basis period reform, including an on-demand webinar.

And, for platinum members – Tax tools contains calculators to help determine the impact of the 2023/24 transitional year as well as flowcharts that cover changing accounting date and how losses can be used.

On HMRC’s website you can find Helpsheet 222 and worksheets to help calculate assessable profits for the 2023/24 tax year:

If you would like more information about joining 20:20 Innovation why not book a free 30-minute demo with our team today or call us on +44 (0) 121 314 2020.