Simplifying Taxation for Self-Employed Traders and Unincorporated Entities

Tax Question

What is the basis period reform and what is the transitional year, what do I need to know?

Tax Answer

Basis period reform is a change in the way trading income is allocated to tax years for self-employed traders, partners in trading partnerships, and other unincorporated entities with trading income. This measure changes the current system, known as the current year basis, to a tax year basis with effect from the tax year 2024/25.

This means that a business’s profit or loss for a tax year will be the profit or loss arising in the tax year itself, regardless of its accounting date.

Basis period reform aims to create a simpler, fairer, and more transparent set of rules for the allocation of trading income to tax years. It will remove all existing requirements of the basis period rules, such as double taxation of early years of trading profits and maintaining accurate records of overlap profits and relief, which are often lost and not utilized by traders.

The transitional year for this reform is 2023/24. During this year, businesses that do not have an accounting year end date between 31/3 and 5/4 will need to recognize two profit elements:

  • The ‘standard part’ – being the profit on the 12 months’ worth of trading beginning with the start of the basis period ending in the transitional year; and
  • The ‘transitional part’ – being the profits in respect of the period beginning immediately after the end of the basis period and ending on 5 April 2024. From this amount, the business can then take off their overlap profits.

Under the current year basis of assessment, traders with a year-end other than 31/3 or 5/4 will have overlap profits. There are two types of overlap profit depending upon when the business commenced.

HMRC has confirmed that they should be able to provide details of any transitional overlap profit for businesses that existed at 6 April 1996, when the self-assessment current year basis of assessment was introduced. See BIM81110

For businesses that commenced after that, under the current year basis of assessment, overlap profits are profits that arise in the opening years and were taxed twice.

If you need any assistance in this or any other matter, please feel free to get in touch.

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