Basis period reform is now in force - what it changed for the self-employed

HMRC's basis period reform is now in force. From the 2024/25 tax year onwards, sole traders and partnerships are taxed on the profits of the tax year itself (6 April to 5 April), not the profits of the accounting year ending in that tax year. If your accounts run to 31 March or 5 April, nothing changed for you. For everyone else, this is one of the biggest shifts in self-employed taxation in a generation.

The transition year was 2023/24. In that year, businesses with accounting periods ending on dates other than 31 March to 5 April were taxed on profits from the end of their previous basis period right through to 5 April 2024. That could mean considerably more than 12 months of profit landing in a single tax year. The extra slice is known as transition profit.

After deducting any unused overlap relief, the transition profit is spread over five years. The rules required at least 20% of it to be taxed in 2023/24, with the balance spread equally across the following four tax years. Spreading is automatic - you do not need to elect into it.

On overlap relief: any unused overlap relief could be set against transition profit in 2023/24, but HMRC's guidance is clear that overlap relief not used then cannot be carried forward into later years. It is use-it-or-lose-it.

What does this mean in practice? If your accounting year end is not 31 March or 5 April, working out the taxable profit for the tax year can now mean apportioning profits across two sets of accounts - one straddling the start of the tax year and one straddling the end. It is fiddly, and it is why many affected businesses simply changed their accounting date to 31 March, which the tax-year basis treats as equivalent to 5 April.

If you are still on a non-March year end, it is worth reviewing your position with your accountant: the transition profit still sitting on your return will be working its way through the five-year spread, and any change of accounting date now needs to be handled carefully so it does not create fresh complications.