Basis Period Reform and claiming overlap relief
If you are self-employed, the way in which your profits are taxed is changing.
As a result of the changes, you only have a limited window in which to claim relief for any profits which were taxed twice when you started your business.
Basis period reform
For 2022/23 and earlier tax years, self-employed individuals, whether sole traders or partners in a partnership, were taxed on a current year basis. This meant that profits for the accounting period that ended in the relevant tax year were taxed on the individual. However, from 2024/25, HMRC will charge tax on profits arising during the 2024/25 tax year. If you prepare your accounts to 31 March or 1 to 5 April, this is deemed to be equivalent to the tax year and you will be unaffected by these changes. However, if you prepare your accounts to another date, you will need to apportion the profits from two accounting periods to arrive at profit for the tax year.
To move from the current year basis to the tax year basis, the 2023/24 tax year is a transition year. If your accounting date does not correspond to the tax year (or is not treated as corresponding to the tax year), you will be taxed on more than 12 months’ profits in 2023/24. The profits taxed are those for the 12 months from the end of your 2022/23 basis period, plus those for the remainder of the 2023/24 tax year, less any overlap relief. For example, if your prepare your accounts to 30 September, in 2023/24 you will be assessed on the profits for the year to 30 September 2023 plus the profits from 1 October 2023 to 5 April 2024, less any overlap relief.
The profits from 1 October 2023 to 5 April 2024 represent transition profits. These profits, less any overlap relief, are spread over five tax years from 2023/24, unless you elect otherwise.
Overlap relief
Overlap profits are profits that are taxed twice. This may occur either in the early years of a business or on a change of accounting date. Under the current year basis, relief for overlap profits (overlap relief) was given on cessation or in a tax year in which there was a change of accounting date and as a result more than 12 months’ profits were taxed in that year.
If you have overlap profits in respect of which relief has not been claimed, the last chance to do this is for the 2023/24 tax year. Relief will normally be claimed against the transition profits for that year.
Overlap relief must be claimed in your 2023/24 tax return, which must be filed by 31 January 2025.
Determining your overlap profits
To claim overlap relief, you will need to know what your overlap profits are. This may not be a number that you have easily to hand, particularly if you started your business many years ago.
HMRC are launching an online form which can be used to submit requests for details about overlap relief. At the time of writing, it was expected that the service would be available from 11 September 2023. They will only be able to provide information on overlap relief if the figures are recorded in their systems, taken from tax returns that you submitted previously. If the information was not provided to HMRC in your tax returns, HMRC will be unable to provide it. When making a request for overlap relief information, you need to supply some details about your business to HMRC.
You can make a request for information on your overlap profits ahead of the launch of the online form. If you choose to do this, you will need to supply the following information:
- your name;
- your National Insurance number or your Unique Taxpayer Reference (UTR);
- a name or description of your business, or both;
- whether you operate as a sole trader or are in a partnership;
- the date that you commenced as a sole trader or the date of commencement of the partnership, as applicable;
- the start and end date of the most recent accounting period; and
- the year(s) in which the accounting date changed, if relevant.
Relief for overlap profits that is not claimed for the 2023/24 tax year will be lost.