Self-employed tax basis period reform

The self-employed tax basis period reform has changed the way trading income is allocated to tax years. Under the reforms, the tax basis period has changed from a ‘current year basis’ to a ‘tax year basis’.

This means that all sole trader and partnership businesses must now report their profits on a tax year basis, beginning with the self-assessment return due by 31 January 2025 (covering the tax year 2023-24) and future years.

Under the old rules there could be overlapping basis periods, which charged tax on profits twice and generated corresponding ‘overlap relief’ which was usually given on cessation of the business. The new method of using a ‘tax year basis’ has removed the basis period rules and prevents the creation of further overlap relief.

The changes do not affect sole traders and partnership businesses 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 and beyond.

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

Any excess profit (after overlap relief) covering more than 12 months, is known as ‘transition profit’. The transitional profit will be spread by default over 5 tax years from 2023-24 until 2027-28.