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Published on 12 July 2023

New rules for taxing self-employed profits

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From April 2024 some self-employed individuals (sole traders) and partnerships will be taxed on profits calculated over a different time period to their accounting year. This is because new ‘basis period reform’ rules are being introduced which mean all self-employment and partnership profits will be taxed on a tax year basis. The 2023/24 tax year is a transitional year and so there are transitional rules to ensure that all relevant businesses are ready to move onto the tax year basis from 6 April 2024.

This article explains what basis period reform (BPR) is, who may be affected and what you need to think about during this current tax year if these changes affect you.

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Who is affected?

Self-employed sole traders and partnerships (known as unincorporated businesses) who do not have an accounting period ending on 31 March, 1 April, 2 April, 3 April, 4 April or 5 April will have to make changes to the way they report profits on their tax returns from the 2023/24 tax year onwards.

This is because from 2024/25 onwards, unincorporated businesses must report their profits on a tax year basis. This means reporting profits for the period from 6 April in one year to 5 April in the following year. We explain how to do this in our detailed guidance on BPR.

If you already have an accounting period ending between 31 March and 5 April inclusive, then there is a relaxation of the rules and you can continue to report your profits as usual as the rules treat any accounting period ending on any of those dates as matching the tax year. However, you may still be affected by BPR if you have unused overlap relief.

How will basis period reform affect my tax position for this tax year?

There are two ways BPR may affect your tax position in the 2023/24 tax year.

Firstly, any overlap relief must be claimed for the 2023/24 tax year or it will be lost forever. You may have unused overlap relief if you don’t have a 5 April accounting year-end or you have changed accounting period. We explain about why you may have overlap relief on our website.

Secondly, in 2023/24, the transitional rules mean that you will be taxed on profits for the period beginning on the day after the end of your last accounting period which was taxed in the 2022/23 tax year and ending on 5 April 2024.

For example, if your accounting year ends on 31 December then for the 2022/23 tax year you will have been taxed on your profits for the period: 1 January 2022 - 31 December 2022. The BPR transitional rules mean that in the 2023/24 tax year you will be taxed on profits for the period 1 January 2023- 5 April 2024.

This can result in profits being calculated for a period longer than 12 months. So, any available overlap relief should be used to reduce the amount of taxable profits in the transitional period and, depending on individual circumstances, it may also be possible to ‘spread’ some of the profits, so they are taxed over the 2023/24 - 2027/28 tax years.

What do I need to do now?

As you can see there are some big changes for some sole traders and partnerships from the 2023/24 tax year onwards. The changes under BPR will be complicated for some businesses and we only offer general guidance below, therefore you may want to consult a professional tax adviser about your individual circumstances.

Affected businesses may want to start considering a few areas of BPR over the next few months:

  1. Do you have any unused overlap relief? As explained above, any remaining overlap relief must be used in the 2023/24 tax year otherwise it will be lost. There is more information about how to find out about available overlap relief in our detailed BPR guidance.
     

  2. Should I change my accounting period? If you do not have an accounting period ending between 31 March - 5 April (inclusive) then you may want to consider changing your accounting date to 31 March or 5 April to make the move to reporting profits on a tax year basis more straightforward. However, you do not have to change your accounting year-end but if you don’t then you will still need to report your profits to HMRC on a tax year basis.
     

  3. If I decide to change my accounting period to 31 March or 5 April- should I do so in the 2022/23 or 2023/24 tax year? If you are going to be affected by BPR and want to change your accounting year-end please note there are different conditions if you do this in the 2022/23 tax year rather than in the 2023/34 tax year.

Where can I find out more about Basis Period Reform?

There is detailed information on our BPR webpage. We will continue to update this page when there is further information such as how to check your available overlap relief.

HMRC will be providing guidance on the GOV.UK website in due course and this should explain how you can check your overlap relief position.  There is detailed technical information in HMRC’s Business Income Manual which is aimed at professional advisers but does contain examples on calculating profits and the spreading rules.

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