If you’re a business owner who pays tax through Self Assessment, the term “basis period reform” may not yet be on your radar. It’s not the most attention-grabbing topic, but for thousands of sole traders and partnerships across the UK, this upcoming change has real consequences. Understanding how the reform affects your business is essential to avoid unexpected tax liabilities and to make the most of the transition period.
Currently, UK businesses that are not incorporated (such as sole traders and ordinary partnerships) pay tax on profits reported through their own choice of accounting year-end. Many choose dates that don’t align with the official tax year, which runs from 6 April to 5 April. As a result, two businesses earning the same income but reporting to different year-ends can end up with very different tax liabilities. This inconsistency is what the basis period reform is aiming to address.
What Is the Basis Period Reform?
HMRC is introducing this reform to simplify the system. From the 2024/25 tax year, all affected businesses must report their profits on a tax-year basis, regardless of when their financial accounts are prepared. The intention is to standardise the process and remove discrepancies that arise from varying year-ends.
At present, the UK tax system allows businesses to be taxed based on their own accounting date, which can lead to differences in how much tax they pay from year to year, even when their profits remain constant. This is particularly problematic for businesses that don’t use a year-end close to 5 April. HMRC’s reform will eliminate these differences by taxing all businesses based on income earned within the same tax year period.
The move toward a uniform tax-year basis means greater clarity and consistency, particularly when it comes to comparing business finances or planning for future tax obligations. However, it also introduces new responsibilities, especially for those whose accounting periods do not match the tax year.
Who Is Affected by the Reform?
The reform primarily affects businesses whose accounting year does not end between 31 March and 5 April. This includes:
- Sole traders and members of ordinary partnerships with non-aligned accounting year-ends
- Seasonal businesses that prefer different year-ends for operational or financial planning reasons
- Larger partnerships that historically used year-ends like 30 June or 31 December
- Trading trusts and estates with income subject to Income Tax
- Non-resident companies with trading income in the UK
Businesses that already align their year-end with the tax year will not need to make changes unless they have what is known as overlap relief. Overlap relief is a mechanism that allows businesses to claim tax relief for profits that were taxed more than once when the business started or changed its accounting date.
Additionally, any business that starts trading from 6 April 2024 onwards will automatically be required to follow the new tax-year basis. For these new businesses, the reform simplifies reporting from day one and eliminates the need for adjustments due to overlap profits or year-end timing differences.
Understanding Overlap Relief
Overlap relief plays an important role in the transition to the new rules. It helps reduce taxable profits in cases where a business was taxed twice on the same profits. This typically occurs:
- In the early years of trading when the business’s accounting date didn’t match the tax year
- When a business changed its accounting year-end after it had already started trading
Overlap relief allows affected businesses to deduct previously taxed profits from their income, thereby lowering their overall tax bill. However, this relief must be used during the 2023/24 transition period. Any overlap relief that remains unused after 5 April 2024 will be lost permanently.
This is particularly important for long-standing businesses that may not even realise they have overlap relief available. To determine how much relief you’re entitled to, you can contact HMRC. The process of obtaining this information can take several weeks, especially for businesses with complex tax histories.
The Transition Period Explained
The 2023/24 tax year serves as a transition period. During this year, businesses must adjust their profit reporting to align with the new tax-year basis. This means:
- Businesses with accounting year-ends earlier than 31 March 2024 must declare profits for the period between their year-end and 5 April 2024
- This may involve estimating profits for the remaining months, or preparing additional financial records to support the figures
For example, if your accounting year ends on 31 December 2023, you must report income from 1 January 2024 through 5 April 2024. This is in addition to your usual 12 months of reported income. The result could be a higher tax bill, since more months of profit are included in one tax return.
To help ease the impact, HMRC is allowing transition profits (those covering the extra months) to be spread over five tax years. This means that any increased tax bill resulting from the transition can be paid gradually, reducing immediate financial pressure.
Practical Challenges Businesses Will Face
While the reform’s intent is simplification, the practicalities involved are anything but simple. Businesses will need to adjust their processes for tracking and reporting income. For some, it might even mean changing their accounting year-end to align with the tax year.
This could involve additional administrative costs, accounting fees, and potential complications in forecasting and budgeting. Seasonal businesses, for example, may find it particularly difficult to estimate profits for part of a year, especially if they usually have a quiet or busy period outside the tax year.
Additionally, accounting software and internal systems may need updates to accommodate the new reporting framework. Ensuring that financial records are accurate and up-to-date will be more important than ever to avoid errors and penalties.
What This Means for Tax Planning
With the shift to a tax-year basis, businesses must reassess their tax planning strategies. There may be opportunities to accelerate or defer income and expenses to manage tax liability more effectively during the transition. Working closely with an accountant or tax advisor is advisable to explore options such as:
- Whether changing your accounting date makes sense for your business
- How best to use any available overlap relief
- Managing cash flow during the years you are spreading transition profits
- Budgeting for potentially higher tax payments in the short term
These strategic decisions should be made sooner rather than later. The earlier you prepare, the smoother the transition will be. Waiting until the last minute could result in poor decisions or missed reliefs.
Role of HMRC and Official Guidance
HMRC has published official guidance on how to handle the transition period and how to calculate and use overlap relief. You can access this information through the government’s website. If you believe you’re entitled to overlap relief but aren’t sure of the amount, you’ll need to contact HMRC directly. Be aware that it may take up to three weeks—or longer if your tax situation is complex—to get a response.
Staying up-to-date with HMRC announcements and guidance is crucial. The rules around the transition and future tax-year reporting are detailed, and mistakes in interpretation could lead to incorrect tax returns or penalties.
Key Concepts
To recap the essentials:
- The basis period reform takes effect from the 2024/25 tax year
- All unincorporated businesses will be taxed on income earned between 6 April and 5 April, regardless of accounting year-end
- The 2023/24 tax year is a transition year requiring adjustments in profit reporting
- Overlap relief must be used by 5 April 2024 or it will be lost permanently
- Transition profits can be spread over five years to ease the tax burden
Taking time to understand and respond to these changes now can help your business avoid unnecessary complications.
Sole Traders with Non-Standard Accounting Dates
Sole traders form a significant portion of businesses impacted by the basis period reform. While many sole traders already align their accounting year with the tax year ending 5 April, there is still a substantial number who prefer using different dates, often for historical, operational, or seasonal reasons.
For example, a sole trader running a tourism business may choose a 30 September year-end to align with the close of their peak season. Under the current system, they report profits from 1 October to 30 September. With the reform, they will be required to report profits earned between 6 April and 5 April regardless of their preferred year-end.
This shift means sole traders must adapt their record-keeping practices. During the 2023/24 transition year, they must include income up to 5 April 2024. If their normal year-end is 30 September 2023, they must also account for profits from 1 October 2023 to 5 April 2024. This creates a longer period of taxable income for that one year and may increase the tax bill temporarily.
Partnerships Facing Structural Complexity
Ordinary partnerships are another group that will see substantial changes. Partnerships often have more complex structures, including income sharing, partner changes, and varied accounting methods. For instance, many large partnerships choose 31 December as their year-end to simplify international reporting or coordinate with their financial reporting schedules.
Under the reform, these partnerships must calculate taxable profits for each partner on a tax-year basis. If a partnership continues using a 31 December year-end, it must estimate or apportion profits for the period from 1 January to 5 April to ensure complete coverage for the 2023/24 tax year. Partners may have to report on income that spans a hybrid of the old and new basis periods.
To manage this complexity, partnerships may need additional bookkeeping support, adjusted accounting systems, and more frequent internal profit calculations. Failure to prepare may result in misreported figures, disputes between partners, or HMRC inquiries.
Seasonal Businesses and Their Unique Challenges
Seasonal businesses will face additional challenges under the reform. Whether it’s hospitality, agriculture, or retail operations tied to holidays, many such businesses have accounting dates that reflect their active trading seasons.
A seasonal business with a 31 August year-end will now need to calculate additional income for the 7 months between 1 September and 5 April for the 2023/24 tax return. If those months coincide with their low season, estimating profits could be difficult. In contrast, businesses whose busy season spans the added period might face a steep increase in taxable income during the transition.
Such businesses must rework their planning processes and cash flow forecasts. Using prior years as a guide to estimate income may be viable, but unpredictable demand, pricing changes, or operational disruptions can make this approach risky. To avoid miscalculation penalties, many will opt for professional assistance during this period.
Businesses Using Fiscal-Year Ends
Many businesses historically opt for fiscal-year ends such as 31 March or 31 December, aligning with commercial or international reporting. The reform makes it clear that only accounting dates from 31 March to 5 April are deemed to align with the tax year.
Businesses with a 31 March year-end are in the most advantageous position—they can treat their accounting period as being fully aligned with the tax year. No additional reporting or adjustment will be necessary, and they can continue with their current methods.
Those using 31 December or 30 June will need to make adjustments. For instance, if a business closes its accounts on 30 June, it must now include estimated income from 1 July to 5 April. This could involve using provisional figures subject to correction once final accounts are prepared. The risk of errors or underpayments is significant without thorough internal financial processes.
New Businesses Starting from April 2024
Any business that begins trading on or after 6 April 2024 will be automatically brought into the new system. This provides a clean slate, as these businesses will be taxed based on actual profits earned between 6 April and the following 5 April.
Start-ups won’t face complications such as overlap relief or transitional calculations. However, they must still ensure that their financial tracking begins on day one and remains aligned with the tax year to avoid compliance issues. Accurate bookkeeping will be essential, and accounting tools must be set up with the tax-year basis in mind.
While new businesses have the benefit of clarity, they may still struggle with the challenges of forecasting, especially in the early stages. As such, working with advisors from the outset will help lay a solid foundation.
Non-Resident Companies with UK Trading Income
Non-resident companies with trading income subject to Income Tax in the UK are also affected. Historically, such companies might have reported based on foreign accounting periods. The new rules standardise the approach, requiring tax to be reported in alignment with the UK tax year.
This may require significant internal changes, including dual-reporting if the company is still required to use its home country’s fiscal year. Currency conversion, timing adjustments, and reconciliations could all increase in complexity.
In these cases, ensuring the UK branch or operation has standalone records that match the tax year will be key. Non-resident companies may also need to reevaluate their tax residence and reporting obligations more broadly.
Trading Trusts and Estates
Trading trusts and estates also fall under the reform’s scope. Trustees who manage trading income must adjust their accounting to the tax-year basis. Since trusts can have multiple sources of income and tax treatments, aligning one component may impact overall compliance.
Trustees must ensure that tax filings reflect income earned between 6 April and 5 April, even if trust accounts use different year-ends. If overlap relief exists, trustees must apply it during the transition year. Failure to do so could increase tax liability or breach trustee duties.
Given the legal responsibilities of trustees and the importance of accurate tax filings, many will need to work with professional advisors to meet the new obligations.
Importance of Identifying Overlap Relief Early
Overlap relief is not only applicable to businesses that change accounting dates but also to those that started trading with an accounting date that did not match the tax year. The amount of overlap relief available depends on how early profits were taxed multiple times.
Locating the original figures may require going back to historical records or contacting HMRC. Businesses that changed accountants or lost old documentation may struggle to determine their entitlement. Since overlap relief must be used in the 2023/24 transition year, this task should not be delayed.
Once the overlap figure is identified, it can be used to reduce taxable income for the transition period. This is especially helpful for businesses expecting higher income in the bridging months. Using the relief properly can reduce tax pressure and smooth the shift to the new system.
Estimating Additional Profits for 2023/24
Estimating profits for part of a year is one of the biggest practical challenges under the reform. Businesses must declare income up to 5 April 2024, even if their normal year-end falls before that. This could mean calculating three to six months of additional profits based on incomplete records.
There are several methods for estimating profits:
- Using actual results for the additional period if available
- Applying a pro-rata approach based on prior months or years
- Relying on projected performance backed by operational data
Once final figures become available, businesses must correct estimates in future tax returns. This adds a layer of administrative effort and demands rigorous record-keeping. Businesses with volatile income or inconsistent cash flow will face added difficulties.
Managing Cash Flow and Payment Planning
With the potential for a higher tax bill in 2023/24, businesses must assess the impact on their cash flow. While spreading the transition profit over five years softens the blow, it still represents a long-term obligation. Budgeting accordingly and setting aside reserves will help manage this adjustment.
Some businesses may choose to adjust their invoicing, purchasing, or payroll strategies to manage profits during the transition period. Others might look into short-term financing or government support if they face liquidity challenges.
Financial advisors can help develop payment strategies, taking advantage of allowable deductions, capital allowances, or deferrals. Avoiding a large, unexpected tax bill depends on planning early and understanding how the new rules interact with your unique business cycle.
Record-Keeping and Compliance Preparation
Accurate and timely record-keeping will be essential throughout the reform process. This includes maintaining detailed monthly income and expense records, especially if your accounting year does not match the tax year. Businesses must be able to substantiate estimated figures and document how projections were calculated.
Using digital accounting software that allows for flexible reporting and real-time updates will be especially beneficial. Some software can automatically adjust reports to fit the tax year format, easing the administrative burden.
Furthermore, businesses should prepare for more questions from HMRC during this transition. Any discrepancies or inconsistencies in reporting can trigger reviews. Ensuring your data is audit-ready and supported by documentation will be essential.
How to Prepare and Take Action Before the Transition Ends
With the implementation of the basis period reform drawing near, businesses that pay tax through Self Assessment must act decisively to align their accounting practices with the new requirements. The transition period for the 2023/24 tax year is a critical window during which you can make strategic adjustments to minimize disruptions and potential tax burdens. This outlines a detailed step-by-step guide for what actions to take now, how to manage the transition year, and how to handle your first tax return under the new tax-year basis. The goal is to support all impacted entities in navigating the shift smoothly and in full compliance.
Review and Understand Your Current Accounting Date
The first step toward compliance is to confirm your current accounting date and evaluate whether it falls outside the 31 March to 5 April window. This date determines whether your business will be directly impacted by the reform.
If your current accounting year-end already aligns with the tax year (any date between 31 March and 5 April), then the changes are minimal. However, if your accounts end on any other date, you will need to take steps to adapt your accounting and reporting practices accordingly. This might include changing your accounting year or modifying internal reporting cycles to match the tax year.
Understanding how your accounting date affects your taxable profit calculation is key. For example, if your accounting year ends on 30 September, you will need to include income from 1 October to 5 April as part of your 2023/24 return, and from then on, report all profits using the tax-year basis.
Locate and Apply Overlap Relief Before It Expires
If your business has previously been subject to overlapping accounting periods, overlap relief may apply. Overlap profits typically arise during the early years of trading when profits are taxed more than once due to accounting date mismatches.
The 2023/24 transition year is the final opportunity to use any existing overlap relief. After 5 April 2024, unused relief will be forfeited permanently. Therefore, identifying your overlap profits is a time-sensitive task.
You can check your previous Self Assessment records or request this information from HMRC. Be aware that responses can take several weeks, so initiate this request promptly. Once obtained, apply the relief to reduce your taxable income during the transition year, easing any potential increase in your tax bill.
Failing to claim overlap relief during the transition period could lead to overpayment of tax and lost financial advantages. Make sure the relief amount is accurately calculated and reported.
Decide Whether to Change Your Accounting Date
Businesses affected by the reform face a strategic decision: should they change their accounting date to align with the tax year, or maintain their current year-end and adjust for tax reporting purposes?
Changing your accounting year to match the tax year simplifies ongoing compliance. It removes the need for estimating or apportioning profits in future tax years. However, this might disrupt operational or commercial processes tied to your current year-end, such as seasonality, staffing cycles, or financial reporting obligations.
If you choose to retain your existing accounting year-end, you must prepare to submit estimated figures for the remaining months of each tax year and later correct these when final accounts are available. This increases administrative workload and risk of inaccuracies. Businesses should consult with an accountant to weigh the pros and cons of changing the accounting date versus maintaining the status quo with more complex tax reporting.
Estimate Additional Profits for the Transition Year
For the 2023/24 tax return, businesses with a non-tax-year accounting date must include not only their usual 12-month profit but also the profits from the additional period leading up to 5 April 2024.
For example, if a business’s accounting period ends on 30 June 2023, it must include profits for the period from 1 July 2023 to 5 April 2024 in its 2023/24 return. This results in reporting approximately 21 months of profits in a single tax year.
Estimating profits for the extended period can be approached in several ways:
- Use actual figures if management accounts are available
- Apply seasonal trends or historical averages
- Use pro-rata calculations based on the last full accounting period
Make sure to document the basis for your estimates, as HMRC may request evidence. Any differences between estimates and actual results must be corrected through an adjustment in a future return. Keep all financial documentation, including invoices, receipts, and ledgers, readily available for verification.
Spread the Additional Tax Burden Over Five Years
To prevent the financial strain caused by the extended reporting period, the government allows businesses to spread the additional tax from the 2023/24 transition profits over five years.
This option helps to ease cash flow concerns and provides time to plan for any increased tax liability. Businesses can elect to spread the tax due over the following tax years, starting in 2024/25.
Electing to spread the liability must be done correctly in the 2023/24 Self Assessment return. Work with a tax advisor to ensure that the election is made properly and that the resulting payment schedule fits into your broader financial planning.
Although spreading offers relief, it’s important to monitor the deferred tax obligation across the five years. This future liability remains on the books and must be factored into cash flow forecasts and profit distribution plans.
Update Your Bookkeeping and Accounting Systems
Adjustments to your accounting practices must be reflected in your record-keeping systems. This includes modifying the way income and expenses are tracked and reported.
Many cloud-based and desktop accounting solutions allow for customized reporting periods. Work with your software provider or accountant to set up tracking that matches the tax-year basis. You may need to create interim management accounts or separate ledger reports for the bridging months during the transition year.
Ensure that your internal team understands the new structure and can accurately enter, categorize, and report transactions. Consistency in record-keeping will reduce errors and streamline the process of estimating and correcting future returns.
Where manual records are still used, you may need to switch to more modern accounting systems. The need for timely and accurate data has increased under the new rules, and paper-based systems are more prone to oversight.
Consult with a Professional Tax Advisor
Navigating the basis period reform involves complex calculations, strategic decisions, and new reporting processes. For most businesses, especially partnerships or those with high seasonal variance, working with a qualified tax advisor is essential.
A professional can help you:
- Identify and apply overlap relief
- Decide whether to change your accounting year
- Estimate profits accurately
- Elect to spread the tax liability
- Prepare corrected figures for future returns
Involving a tax expert early ensures your compliance obligations are met, penalties are avoided, and opportunities for tax efficiency are explored fully. Advisors can also help you manage interactions with HMRC and represent your interests in case of disputes or reviews.
Prepare for Your First Tax-Year Based Return
The 2024/25 tax year will be the first year when all businesses must report income on a tax-year basis. This means submitting a Self Assessment return that reflects income earned strictly between 6 April 2024 and 5 April 2025.
To prepare:
- Review financial systems and ensure they track data according to the tax year
- Create a new reporting calendar aligned with the tax year
- Schedule interim profit calculations throughout the year
- Adjust internal reporting timetables to support timely tax return submissions
If your business continues to use a different accounting date, plan for a two-step reporting process: submitting provisional figures for the tax year followed by amended submissions when final accounts are ready. Keep detailed notes on the method used to estimate figures.
Revisit Budgeting and Cash Flow Forecasts
With the basis period reform changing how and when income is taxed, your budgeting processes may also require adjustments. This is particularly true for businesses affected by the extended transition period or those choosing to spread their additional tax.
Update your forecasts to reflect:
- Additional tax due for 2023/24 and how it will be paid
- New profit periods aligning with the tax year
- Changes to financial commitments due to adjusted cash flow
Cash reserves may need to be built up to handle peak payment periods. Consider working with your finance team to reallocate resources or delay non-essential expenditures.
Good forecasting also supports better decision-making in other areas of your business, such as staffing, marketing, and capital investment. Understanding your adjusted tax timeline will help prevent liquidity issues.
Monitor HMRC Communications and Updates
While the broad details of the basis period reform are already established, HMRC continues to provide technical updates, case examples, and new guidance. Staying informed is essential.
Make it a priority to:
- Regularly check official government websites for new publications
- Subscribe to updates or newsletters from HMRC
- Attend webinars, briefings, or online forums hosted by tax professionals
HMRC also publishes frequently asked questions and provides calculators and tools that can assist with estimates and return preparation. Being proactive about updates ensures you don’t miss deadlines, relief claims, or new interpretations of the rules.
Train and Educate Your Internal Team
The basis period reform is not just a matter for your accountant. Your internal finance or operations team needs to understand the implications, especially if they are involved in record-keeping, reporting, or preparing draft accounts.
Offer training sessions, workshops, or resource materials to bring everyone up to speed. Topics might include:
- Transition year requirements
- Estimating profits for part-year periods
- Using overlap relief effectively
- Adjusting workflows for tax-year based tracking
Clear internal communication will minimize errors, promote consistency, and allow your team to support your advisor’s efforts effectively. Having a knowledgeable team means issues can be spotted early, reducing reliance on last-minute corrections or risk of penalties.
Build a Long-Term Tax Strategy
Finally, the reform offers a good opportunity to reevaluate your overall tax strategy. Consider how aligning with the tax year might simplify future tax planning, reporting, and investment decisions.
Think about:
- Structuring income recognition to align with the tax year
- Making business investments at times that maximize reliefs
- Planning dividends and partner drawings around tax-year forecasts
- Using allowances and deductions to offset taxable income
The reform reduces differences between businesses and improves comparability. This opens the door to benchmarking your tax strategy against industry norms and improving efficiency over time.
Conclusion
The basis period reform represents a major shift in how unincorporated businesses in the UK report and pay tax. While it may seem complex or burdensome at first, especially for those unfamiliar with the intricacies of Self Assessment and accounting periods, its long-term goal is to create a tax system that is more consistent, transparent, and equitable.
For sole traders, partnerships, and other unincorporated businesses, the reform brings a unique opportunity to reassess accounting practices, improve financial reporting accuracy, and establish greater alignment between profits and tax liabilities. Those whose accounting year-ends do not fall between 31 March and 5 April must act promptly to ensure full compliance by the end of the 2023/24 transition year.
The need to identify and apply overlap relief before it expires cannot be overstated. Overlap profits that are not used during the transition period will be lost, potentially leading to higher taxable income and avoidable financial strain. Spreading the additional profits over five years is a helpful relief, but it still requires careful planning and clear understanding of your financial position.
Changing your accounting date to match the tax year could simplify future reporting, while sticking to your current date may preserve internal processes at the cost of increased administrative burden. Regardless of the route you choose, detailed record-keeping, accurate estimates, and timely reporting are critical to meeting the new obligations.
Throughout this series, we’ve emphasized the importance of preparation. Updating your accounting systems, consulting with a tax advisor, and educating your team are not optional steps, they are essential actions that will determine whether your transition is smooth or stressful.
The first tax-year-based return in 2024/25 will mark the beginning of a new reporting norm. Businesses that start planning now will be in a much stronger position to adapt, minimize disruption, and ensure they are taking advantage of every available relief.
Ultimately, the basis period reform is not just about compliance, it is about gaining clarity and control over your business finances. With the right strategies and support, your business can not only meet the new requirements, but thrive under them.