Financial year 2023/24 is important in the move from basis periods to the tax year basis for unincorporated businesses. Richard Jones looks at how to approach the change.
The government identified basis period reform as a simplification opportunity just over three years ago. Although the measure may make life easier for 2024/25 onwards, it may not feel like a simplification when completing tax returns for 2023/24. For sole traders and partners who haven’t previously prepared accounts to 31 March or 5 April, there are additional boxes to complete on the tax return, and quite likely additional tax to pay too.
Basis period reform
As part of basis period reform, an individual’s business profits will be taxed on a tax year basis for 2024/25 onwards. For 2022/23 and earlier, the person was taxed by reference to their basis period. 2023/24 is a transition year. The process for moving from the basis period to the tax year can be complicated where:
- the business commenced in 2022/23 or earlier;
- it did not cease in 2023/24; and
- its accounts are prepared to a date other than 5 April (an equivalence rule treats 31 March-4 April as 5 April where accounts are made up to 31 March-4 April).
In this case, the person’s taxable profits for 2023/24 comprise:
- a standard part. This is the 12 months following the end of the basis period for 2022/23; and
- a transition part. This begins with the end of the standard part and ends on 5 April 2024 (subject to the equivalence rules described above).
The profit/loss for the transition part is reduced/increased by any brought forward overlap profits. The net amount (where positive, and reduced by any loss from the standard part) is spread over five tax years unless the person elects otherwise.
The pre-existing basis period rules, including the rules relating to a valid change of accounting date (s216 and 217, Income Tax Trading and Other Income Act 2005), do not apply for 2023/24. These include the 18-month test that effectively says that if a long period of account is used to move the accounting date of business, that period cannot exceed 18 months in length. As this test does not apply in 2023/24, a business with a 30 April year-end wishing to realign to 31 March, for example, may complete:
- one 23-month set of accounts;
- two sets of accounts of 12 months and 11 months; or
- many other permutations.
However, it should be noted that the rule that restricts a period of account to 18 months for capital allowances purposes (s6(6), Capital Allowances Act 2021) does still apply, such that, in this example, the business would be treated as having two separate chargeable periods for capital allowances purposes.
For detailed guidance on basis period reform, see the Tax Faculty’s TAXguide 02/22.
Completing the tax return for 2023/24
Where the person is affected by basis period reform (see above), they should complete the full supplementary pages for self-employment or partnerships for 2023/24 as appropriate. These pages contain additional boxes at 73.1 to 73.4 for sole traders and at 16.1 to 16.4 for partnerships.
The new boxes record the profit or loss for the transition part, before and after any overlap profits are deducted, and the amount to be considered for 2023/24, net of loss relief where applicable.
The pre-existing basis period rules, including those relating to a change of accounting date, do not apply for 2023/24
HMRC has published working sheet 3 to help the self-employed calculate their taxable profits where they are affected by basis period reform. Where more than one accounting period falls wholly or partly in 2023/24, the taxpayer will also need to complete self-employment supplementary pages for each of the other periods representing part of the results for that tax year.
The taxpayer or agent is required to:
- prepare full supplementary pages for the ‘latest’ accounting period, completing boxes 1-63 and 83-99. Use the working sheet to help complete boxes 64-77 and then complete boxes 78-82 and 100-102; and
- include the details of other accounting periods on short or full supplementary pages as appropriate. Complete boxes 1-27 on the short pages or boxes 1-63 and 83-99 on the full pages. Use the working sheet to help complete box 28 or 32 (short) or box 64 or 65 (full) of the supplementary pages.
In practice, the taxpayer/agent would need to follow the steps in (2) above before working out boxes 68 onwards under (1).
In terms of using commercial software to prepare returns, it is understood that some software may not allow an accounting period of longer than 18 months, despite the relaxation of the 18-month rule for 2023/24 described above. This means that returns would need to reflect two accounting periods, even where only one set of accounts is completed.
The supplementary pages for the latest accounting period should usually be submitted as part of the person’s tax return. Where this applies, a workaround (unique ID eight) requires the taxpayer to submit the supplementary pages for the other period as an attachment to the return, with an explanation given in the box for additional information. A similar workaround applies with regard to partnerships.
Returns prepared using software may need to reflect two accounting periods, even where only one set of accounts is completed
This is a longstanding workaround, used historically for cases where more than one accounting period is represented in the results for the tax year. Commercial third-party software has been designed around this for a number of years. Contact your software developer If you are unsure about how to apply the workaround. For further details, including other issues and workarounds, see the ITSA technical specifications.
Note that this workaround will be relevant for businesses with accounting year-ends that do not coincide with the tax year, even where the accounting year-end date is not changed in 2023/24. This is because the results from two different accounting periods will need to be taken into account in determining the taxable profit or loss for 2023/24. However, details of an accounting period ending after 5 April 2024 do not need to be submitted as this period may not have ended by the time the return needs to be submitted. That said, the taxpayer may find it helpful to prepare the pages to help them complete the working sheet and their return.
Also, HMRC has provided a calculator for working out the person’s transition profit. If you click ‘preview your results’, the calculator also indicates in which boxes on the return the various elements should be recorded.
Example
Priyanka has run a consultancy business for many years, preparing accounts to 30 April. She has decided to change her accounting date to 31 March to simplify her tax returns for 2024/25 onwards. She has taxable profits of £105,000 for the 12 months ended 30 April 2023 and £95,000 for the 11 months ended 31 March 2024. She had overlap profits of £15,000 brought forward at 6 April 2023.
Following the instructions in the notes to the self-employment pages and using HMRC’s working sheet, Priyanka prepares separate self-employment pages for:
- the 12-month period ended 30 April 2023 (the other period/standard part); and
- the 11-month period ended 31 March 2024 (the latest period/transition part).
She completes all relevant boxes, leaving empty boxes 66-82 and 100-102 on the pages for the other period.
Following the workaround described above, Priyanka submits the pages for the latest period as part of her tax return and the pages for the other period as an attachment to the return.
Priyanka’s trading income for 2023/24 is calculated as follows:
| £ | £ | |
|---|---|---|
| Profits for standard part (12 months ended 30 April 2023) | 105,000 | |
| Profits for transition part (profits for period ended 31 March 2024) | 95,000 | |
| Less, overlap profits | (15,000) | |
| Net transition profits | 80,000 | |
| 20% equals transition profits for 2023/24 | 16,000 | |
| Total amount taxable for 2023/24 | 121,000 |
The figures above are included in the supplementary pages for the latest period as follows (based on the results from HMRC’s calculator):
| Box | Description | £ |
|---|---|---|
| 64 | Net business profit for tax purposes | 95,000 |
| 68 | Basis period adjustment | 10,000* |
| 73 | Adjusted profit for 2023/24 | 105,000 |
| 73.1 | Profit for the transition part | 95,000 |
| 73.2 | Overlap relief used | 15,000 |
| 73.3 | Spread of the transition profit arising for 2023/24 | 16,000 |
| 76 | Total taxable profits from the business | 105,000 |
*This is the difference between the profits entered for the latest accounting period (£95,000) and the total taxable profits from the business for the other accounting period (£105,000).
Had Priyanka stuck with the accounting date 30 April, the latest period would have been the year ended 30 April 2024 of which the 11 months to 31 March 2023 would have been the transition part. See above for guidance on how to report an accounting period that ends after 5 April 2024.
Getting ahead of the game
Where the person is caught up in basis period reform, completing their tax return is likely to be more challenging this year. That, combined with the likelihood that the person will have additional tax to pay, makes it essential to get a head start on tax returns this year. If this feels bad in the summer, it will only feel worse at Christmas.
- TAXguide 07/24: Tax treatment of travel costs for directors of VC portfolio companies
- TAXguide 06/24: Taxation of cars, vans and fuel Q&As
- TAXguide 05/24: Payroll and reward update webinar Q&As
- TAXguide 04/24: The cash basis for trades: Q&As
- TAXguide 03/24: Payroll rates, allowances and thresholds in 2024/25