The upcoming reforms in the UK tax system are set to revolutionise the way trading income is allocated to tax years, particularly impacting sole traders and partnerships utilising specific accounting dates. While companies remain unaffected, the shift from a ‘current year basis’ to a ‘tax year basis’ will bring about significant alterations in the treatment of overlap relief and basis periods.

Under the current regulations, overlapping basis periods have resulted in potential double taxation, necessitating the application of ‘overlap relief’ to rectify any discrepancies. This relief has traditionally been employed during business cessation or alterations in accounting dates. However, with the proposed adoption of the ‘tax year basis’, the complexities associated with basis period regulations will be eliminated, precluding the generation of further overlap relief.

Set to be implemented in the 2024-25 tax year, the transition begins with the current 2023-24 tax year serving as the ‘transition year’. Throughout this transitional period, all businesses’ basis periods will be aligned with the tax year, allowing the utilisation of any outstanding overlap relief against profits for that specific tax year.

For the affected businesses in 2023-24, the assessment of tax profits will be based on:

  • The 12-month accounting period previously in use.
  • The remaining months of the 2023-24 tax year.

Any surplus profit spanning more than 12 months will be categorised as ‘transition profit’ and can be offset by overlap relief. The residual profit will then be distributed over the subsequent 5 tax years until 2027-28.

It is imperative to note that these alterations do not impact sole traders and partnerships whose annual accounts are prepared within the period of 31 March and 5 April. These entities will continue their filing procedures as usual for the 2023-24 accounting year.

Stay informed and prepared for the imminent adjustments in the tax system, ensuring a smooth transition for your business in the coming financial years.

If you would like more information about how we can support your business, please get in touch.


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