Basis period reform: Application of the 2023–24 transition year rules
Contributed by Laura Burrows CTA, Senior Technical Writer, Croner-i Ltd
It was announced as part of Autumn Budget 2021 that the basis period of assessment of trade profits for income tax purposes (the current year basis) would be abolished from 6 April 2024, and replaced with a tax year basis of assessment. Enacted in Finance Act 2022, Sch. 1 , the legislation included transition rules to be applied in the 2023–24 tax year to align profits to the tax year end and give relief for any overlap profits. Now that it is time to prepare and submit self-assessment tax returns for the 2023–24 tax year, this article looks at the application of the transition rules for the 2023–24 tax year.
Who is affected?
The basis period reform primarily affects unincorporated businesses which do not have an accounting period ending between 31 March and 5 April.
In summary:
- for 2022–23 and earlier tax years, a trader is assessed on trade profits arising in the basis period ending in the tax year;
- for 2024–25 and subsequent years, a trader is assessed on profits arising in the tax year; and
- for 2023–24, the transition year, a trader is assessed on profits for the period commencing on the first day after the end of the basis period for 2022–23, and ending 5 April 2024.
Unless an election is made to the contrary, accounting dates ending on any date between 31 March and 4 April is treated as ending on 5 April, and any reference in this article to a 5 April accounting date includes any year end from 31 March to 5 April.
2023–24 basis period
Where a business starts to trade in 2023–24 and does not cease in the year, the basis period for 2023–24 will start with the date the trade commenced and end on 5 April 2024.
If a business ceases in 2023–24, the profits for the final year of trade will be calculated using the rules for the current year basis.
For trades that commenced prior to 2023–24 and continue to trade, the basis period for 2023–24 is split into two parts:
- the Standard Part – the 12-month period beginning immediately after the end of the basis period for 2022–23; and
- the Transition Part – the period beginning immediately after the Standard Part and ending on 5 April 2024.
2023–24 taxable profits
Where there is no Transition Part, the profits for 2023–24 are the profits of the Standard Part less any overlap profits.
Where there is both a Standard Part and a Transition Part, the profit/loss for 2023–24 is calculated by following a step-by-step method as set out in the legislation. This can be summarised as follows.
- Steps 1–4: Calculate the following amounts:
–the Step 1 amount: the profit/loss for the standard part;
–the Step 2 amount: the profit/loss for the transition part;
–the Step 3 amount: the Step 2 amount less any overlap profits; and
–the Step 4 amount: the sum of the Step 1 and Step 3 amounts.
If either of the Step 3 and Step 4 amounts are £nil or less than £nil, the profit/loss for the tax is the Step 4 amount. Otherwise, continue to Step 5.
- Step 5: Identify the transition profits, being an amount equal to the lower of the Step 3 and Step 4 amounts.
- Step 6: Is the Step 1 amount £nil or less than £nil?
–If yes, the profit for the year is the amount of transition profits treated as arising in the year.
–If no, the profit for the year is the sum of the Step 1 amount and the transition profits treated as arising in the year.
In the first instance, the amount of transition profits treated as arising in the year is equal to 20% of the transition profits. However, an election can be made to accelerate the charge on transition profits by specifying an additional amount to be treated as arising in a tax year.
Example
Justin has traded for a number of years, preparing accounts to 30 June. His profit for the year ended 30 June 2023 is £30,000, and it is expected to be £25,000 for the year ended 30 June 2024. He has overlap profits of £5,000.
The relevant amounts are as follows:
| Step 1 amount: Standard part (YE 30 June 2023) | £30,000 |
| Step 2 amount: Transition part (01/07/2023 to 05/04/2024) (280/366 × £25,000) | £19,126 |
| Step 3 amount: Step 2 amount less overlap profits of £5,000 | £14,126 |
| Step 4 amount: Sum of Step 1 and 3 amounts | £44,126 |
As neither of the Step 3 and Step 4 amounts are £nil or less we continue to Step 5.
| Step 5: The transition profits are the lower of £14,126 and £44,126 | £14,126 |
As the Step 1 amount is greater than £nil, the profit for the year is £32,825, calculated as follows:
| Step 1 amount | £30,000 |
| Transition profits arising in year: 20% of £14,126 | £2,825 |
| £32,825 |
Treatment of transition profits
Should the basis period for 2023–24 include transition profits, then rules apply on when had how the tax on these profits arise.
Spreading transition profits
The transition rules allow for transition profits to be spread over five years.
In each of the four years beginning with 2023–24, an amount equal to 20% of the transition profits is treated as arising and chargeable to income tax as trade profits, with the balance chargeable in the fifth year.
Example
As part of the basis period for 2023–24, Joe has transition profits of £40,000.
The amount treated as arising in each tax year is:
- from 2023–24 to 2026–27: £8,000 (£40,000 × 20%); and
- 2027–28: £8,000 (the remaining amount £40,000 – £32,000).
If the trade ceases before all transition profits have been charged to income tax, the balance is treated as arising in the tax year in which the trade permanently ceases.
Accelerating the charge on transition profits
Where an amount of transition profits for 2023–24 is subject to income tax for a tax ear, an election can be made for an additional specified amount to be treated as arising in that year.
The election should be made on or before the first anniversary of the normal self-assessment filing date for the tax year and, if made, the spreading rules apply to subsequent tax years as if the amount of transition profits were reduced proportionally over the remaining years.
Example
Brian has transition profits of £35,000 for 2023–24. He makes an election in 2024–25 to treat an additional £8,000 of the transition profits as arising in the year.
Brian will be liable to tax on the transition profits as follows:
- the transition profits treated as arising in 2023–24 = £7,000 (£35,000 × 20%);
- the transition profits treated as arising in 2024025 = £15,000 (£7,000 + £8,000); and
- the remaining transition profits are reduced by £13,333 (£8,000 × 5/3).
The amount of transition profits to be assessed in each of the subsequent three tax years will be £4,333 (£21,667 × 20%).
Calculating tax on transition profits
Where in a tax year an amount of 2023–24 transition profits is treated as arising, the steps in the income tax calculation at ITA 2007, s. 23 are modified.
The transition amount is excluded from net income with the liability calculated separately and included at step 5 of the calculation. This approach has been taken to reduce the impact on certain allowances and benefits.
The liability is the difference between the income tax due when the transition amount is included in net income and the income tax due when it is excluded.
Example
For 2023–24, a trader has standard profits of £25,000 and transition profits of £12,000. The amount of transition profits arising in 2023–24 is £2,400 (£12,000 × 20%).
They also have £4,000 trade losses carried forward and are entitled to the full personal allowance of £12,570.
The income tax liability on the transition profits is calculated as follows:
Calculation A – excluding transition profits
| Component of total income | Standard profits | Transition profits |
| Profits | £25,000 | £2,400 |
| Less: losses brought forward | (£4,000) | |
| Net income (not including transition profits) | £21,000 | |
| Less: personal allowance | (£12,570) | |
| £8,430 | ||
| Tax @ 20% | £1,686 |
Calculation B – including transition profits
| Component of total income | Standard profits | Transition profits |
| Profits | £25,000 | £2,400 |
| Less: losses brought forward | (£4,000) | |
| Revised profits | £21,000 | £2,400 |
| Net income (including transition profits) | £23,400 | |
| Less: personal allowance | (£12,570) | |
| £10,830 | ||
| Tax @ 20% | £2,166 |
The tax liability for the transition profits for 2023–24 is therefore £480 (£2,166 – £1,686).
Overlap profits
Overlap relief is based on any overlap profits that may have arisen where, on application of the current year basis, some profits will have been taxed twice. This would arise where a business has not always used 5 April as an accounting period but could also include transition overlap relief from when self-assessment was first introduced. Although a business does not have a 5 April accounting date, there may not be any overlap profits to use in 2023–24 because the business made losses when it first started to trade or they have been used in previous years where there was a change of accounting date.
How to find overlap profits
Overlap profits available for 2023–24 should have been included in box 70 of the self-assessment supplementary pages (SA103F) of the 2022–23 tax return. If not, HMRC will try to help businesses to confirm their overlap relief position using information that has been provided in a previous tax return
To do this, taxpayers will need to log into their Government Gateway account. Agents can also make a request on a client’s behalf by using their Agent Services Account. It is possible to request a response by letter or e-mail, and HMRC have stated that they will be in contact within three weeks, although this may take longer for more complex cases.
Losses from overlap relief
Where, on the application of the transition rules, a deduction for overlap profits turns a profit into a loss, or increases an existing loss, this loss (or increase in the loss) is treated as if it were a terminal loss and relieved in accordance with ITA 2007, s. 89–91 as if the trade ceased on 5 April 2024. Meaning that these losses can be carried back to the three previous tax years but only relieved against trade profits in those earlier years rather than total income.
Relief for overlap profits is no longer available after 2023–24. Any overlap profits remaining after 2023–24 will be lost.
Conclusion
The last-minute search for information can be stressful when the 31 January filing deadline is looming; if businesses have not kept records of overlap profits, it is important to gather all information available and, where necessary, apply to HMRC for assistance as soon as possible. Going forward, where accounts are not coterminous with the tax year end, it may be worth, if possible, aligning the accounting period with the tax year to avoid the need to use provisional figures, which will then need to be amended.
Useful links
For commentary on the 2023–24 transition rules, see Direct Tax In-Depth at ¶230-200.
Legislation: FA 2022, Sch. 1 .
See also HMRC Manuals BIM81200ff. , and guidance Get your Overlap Relief figure.
Document downloaded on 12-07-2024 from Croner-i Navigate, the UK’s leading online research service for tax, audit and accounting professionals. Find out more at www.croneri.co.uk or call 0800 231 5199.
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