Basis period reform and transition profits

The tax year basis

HMRC's helpsheet HS222 says trading profits are taxed for the tax year, and profits or losses may have to be apportioned where the accounting period does not match the tax year. Apportionment is not needed where the accounting period ends on 31 March or 1, 2, 3 or 4 April. Profits of the days after such a late accounting date up to 5 April are not included in that year's taxable profits unless the business ceased by then.

Overlap relief could not be used after the 2023 to 2024 tax year, according to GOV.UK.

Apportioning a non-March year end

For example, a sole trader draws up accounts to 30 April. For the 2026 to 2027 tax year, which runs from 6 April 2026 to 5 April 2027, the taxable profit is 25 days of the year ended 30 April 2026 (6 to 30 April 2026) and 340 days of the year ended 30 April 2027 (1 May 2026 to 5 April 2027). With profits of £36,500 and £43,800 for those two years, the 2026 to 2027 profit is £36,500 × 25 ÷ 365 plus £43,800 × 340 ÷ 365, which is £2,500 plus £40,800, giving £43,300. The method follows the apportionment by days that GOV.UK uses.

The accounts to 30 April 2027 may not be ready by 31 January 2028. The SA103F notes allow provisional figures, with the reason and the date final figures will be given in the any other information box. The adjustment for apportionment goes in box 68 on the SA103F, so these clients use the full self-employment pages.

The transition year

GOV.UK says a business whose accounting year end has always been on or between 31 March and 5 April has no transition profit. For other businesses, the 2023 to 2024 basis period was split. The standard part covered the 12 months after the end of the 2022 to 2023 basis period, and the transition part ran from there to 5 April 2024. The profit of the transition part, less overlap relief, is the transition profit.

Worked example of transition profit

For example, a sole trader with a 30 April year end made £60,000 in the year to 30 April 2024. The standard part of the 2023 to 2024 basis period was the year to 30 April 2023, and the transition part ran from 1 May 2023 to 5 April 2024, which is 341 days of a 366-day accounting period. Using the GOV.UK formula, the transition part profit is £60,000 × 341 ÷ 366, which is £55,902.

The trader had overlap relief of £20,000, which is deducted, leaving transition profit of £35,902. Spread equally over five years, £7,180 is taxed in each of 2023 to 2024 and 2024 to 2025, and the rest in the following three years.

Spreading over five years

GOV.UK says the transition profit after overlap relief is spread over 5 years, from 2023 to 2024 to 2027 to 2028. At least 20% was taxed in 2023 to 2024, and the client can elect to accelerate more into any year. HS222 says at least 20% of the original amount will have been taxed in each of 2023 to 2024 and 2024 to 2025.

For 2025 to 2026, the SA103F notes say the remaining transition profit is spread over the next 3 years and 33.3% of the remaining amount goes in box 73.3. An acceleration election means entering the full amount for the year in box 73.3 and the details in box 103. Losses brought forward can be set against the transition profit for the year in box 73.4.

The transition profit for the year counts as taxable profit for Class 2 and Class 4 National Insurance, according to the same notes.

Ceasing to trade

GOV.UK says that if the business ends by 5 April 2027, any transition profit after overlap relief not yet taxed is taxed in the year the business ceased. A client planning to stop trading or retire from a partnership needs the remaining balance in the final year's figures.

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