The Basis Period Reform fundamentally changed how unincorporated businesses allocate trading income to tax years. Following the 2023/24 transition year, the system permanently shifted from the “current year basis” to the “tax year basis” effective from 2024/25. For the 2026/27 tax year, the tax year basis is the standard operational framework for all affected self-employed traders, partnerships, and trusts.
The reform aims to create a simpler, fairer, and more transparent set of rules by aligning trading income with other forms of income, such as property and dividend income.
The Tax Year Basis (ITTOIA 2005, s 7A)
Under the tax year basis, practitioners must assess a business’s profit or loss based on the profits arising strictly within the tax year itself (6 April to 5 April), regardless of the business’s accounting date.
Section 7A of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) dictates the mechanics of this apportionment. If a client’s period of account does not neatly align with the tax year, you must apportion the profits to arrive at the correct figure for the tax year.
Any of the following steps may be taken if they are necessary in order to arrive at the profits or losses of the trade of the tax year— (a) apportioning the profits or losses of a period of account to the parts of that period falling in different tax years…
The legislation requires practitioners to apportion profits by reference to the number of days in the periods concerned, unless an alternative method of measuring the length of the periods is reasonable and used consistently.
Late Accounting Date Rules (Equivalence Rules)
To prevent the administrative burden of apportioning tiny amounts of profit, the legislation provides special “late accounting date” rules under section 275B of ITTOIA 2005.
If a business draws up its accounts to 31 March, or 1, 2, 3, or 4 April, the profits or losses of the period beginning the day after the accounting date and ending with 5 April are treated as nil. The legislation automatically treats the actual profits or losses of that short period as arising in the following tax year.
Year Four of Transition Profit Spreading
During the 2023/24 transition year, businesses with non-tax year accounting dates generated “transition profits” to catch up to the new tax year basis. The legislation dictates that these transition profits are automatically spread over five tax years (2023/24 to 2027/28), with 20% of the total amount treated as arising in each of the first four years, and the balance falling into the fifth year.
For the 2026/27 tax year, clients are entering the fourth year of this spreading period.
Table: Default Spreading Profile for a £50,000 Transition Profit
| Tax Year | Percentage of Transition Profit | Amount Assessed |
|---|---|---|
| 2023/24 (Year 1) | 20% | £10,000 |
| 2024/25 (Year 2) | 20% | £10,000 |
| 2025/26 (Year 3) | 20% | £10,000 |
| 2026/27 (Year 4) | 20% | £10,000 |
| 2027/28 (Year 5) | Balance (20%) | £10,000 |
If a trader permanently ceases to carry on their trade before the start of the fifth year (e.g., during 2026/27), you must bring the entire remaining balance of the transition profits into charge in the tax year of cessation. Furthermore, individuals can elect to accelerate the charge, subjecting a higher portion of the transition profits to tax in an earlier year, which subsequently reduces the balance carried forward to future years.
Interaction with Making Tax Digital (MTD) for ITSA
The Basis Period Reform strategically paves the way for Making Tax Digital for Income Tax Self Assessment (MTD for ITSA). The 2026/27 tax year is a critical milestone. MTD for Income Tax becomes mandatory on 6 April 2026 for sole traders and landlords with a qualifying income over £50,000.
For clients falling into this bracket, the 2026/27 tax year requires not only compliance with the tax year basis and year-four transition profit spreading, but also the submission of quarterly digital updates to HMRC. The mandate expands to those with income over £30,000 from 6 April 2027.
Next steps for research: Review the specific procedural requirements for making an election to accelerate transition profits in 2026/27. Additionally, examine how the interaction between apportioned accounting periods under the Basis Period Reform aligns with the quarterly update periods dictated by MTD for ITSA.
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