Reporting self-employed profits 2023-24

The basis of assessment reforms will change the way trading income is allocated to tax years. The changes will affect sole traders and partnerships that use an accounting date between 6 April and 30 March. There is no change to the rule for companies.

The reforms will change the basis period from a ‘current year basis’ to a ‘tax year basis’.

Under the current rules there can be overlapping basis periods. When this occurs, tax may be charged on profits twice and generate ‘overlap relief’. This overlap relief can be used on the cessation of a business or when an accounting date is changed. The new method of using a ‘tax year basis’ will remove the basis period rules and prevents the creation of further overlap relief.

The new rules will come into effect in the 2024-25 tax year and the current 2023-24 tax year is known as the ‘transition year’. During the transitional year, all businesses’ basis periods will be aligned to the tax year and all outstanding overlap relief can be used against profits for that tax year.

Affected businesses in 2023-24 will be assessed on the tax for profits for the:

• 12 month accounting period they have previously been using; and
• for the rest of the 2023-24 tax year.

Any excess profit covering more than 12 months, is known as ‘transition profit’. This can be reduced by overlap relief and the remaining profit will be spread over the next 5 tax years until 2027-28.

The changes do not affect sole traders and partnerships who draw up annual accounts to a date between 31 March and 5 April. These businesses will continue to file as usual for the 2023-24 accounting year.