Basis period reform – what are transition profits?

The basis period reform means those affected must report their business profits on a tax year basis regardless of their accounting year end. 

In 2023/24 all affected businesses will have to adjust their profits to align with the tax year. 

How are profits calculated? 

If your unincorporated business has a year-end that is not between 31st March or 5th April, you will need to consider the basis period reform when calculating your profits for tax. 

You will be taxed on: 

1. Standard part profits: 12-month period beginning immediately after the end of your basis period for 2022/23. 
2. Transition part profits: Period ending immediately after the end of the standard part to 5th April 2024. 

Example 1 

Standard part profits: 

Your year-end is 30th June. In 2022/23, you reported profits for the 12-month period from 1st July 2021 to 30th June 2022. In 2023/24 the standard part is the 12 months from 1st July 2022 to 30th June 2023. 

Transition part profits: 

Your standard part ends 30th June 2023, so your transition part is from 1st July 2023 to 5th April 2024. 

Example 2 

Standard part profits: 

Your year end is 31st December, in 2022/23 you reported profits for the 12-month period from 1st January 2022 to 31st December 2022. In 2023/24 the standard part is the 12 months from 1st January 2023 to 31st December 2023. 

Transition part profits: 

Your standard part ends 31st December 2023, so your transition part is from 1st January 2024 to 5th April 2024. 

Using numbers, we will look at spreading profits and calculating the transitional adjustment. You can spread out profits by days, weeks or months but you must be consistent in your approach. Our examples use a day’s approach which also includes the 29th February 2024, as it was a leap year. 

Example 1 

1st July 2022-30th June 2023	Profit £45,000
1st July 2023-30th June 2024	Profit £75,000

Standard part profits are £45,000, we then need to add in profits from the second accounting period but apportion them to 5th April. The period is 366 days (including 29th Feb 2024) and we need to include the days from 1st July to 5th April which is 280 days. Taking profits of £75,000 / 366 x 280 = £57,377 is the profit for the transition part. 

Example 2 

1st January 2023-31st December 2023	Profit £50,000
1st January 2024-31st December 2024	Profit £15,000

Standard part profits are £50,000, we then need to add in profits from the second accounting period but apportion them to 5th April. The period is 366 days (including 29th February 2024) and we need to include the days from 1st January to 5th April which is 127 days. Taking profits of £15,000 / 366 x 96 = £3,934 is the profit for the transition part. 

What about Overlap Relief? 

When your business first started trading, assuming you have not changed your year-end, you would have created overlap profits. This means that, under basis year rules, you will be taxed the same profits more than once. These overlap profits could be relieved when you changed year-end, or your business ceased. Now, with the basis period reform you can deduct any overlap profit relief from your transition part.  

You can find your overlap relief by looking at your previous self-assessment tax returns. This may have been included as overlap profit carried forward. If you are unable to find it on your tax return, but it was provided on a previous tax return then HM Revenue and Customs (HMRC) may be able to help. 

If not, HMRC will be able to provide you with the figures to calculate your overlap relief. 

Spreading the transition profit 

Your transition profit, after deducting overlap relief, will be spread over five years from 2023/24 to 2027/28. At least 20% should be taxed in 2023/24, and you can choose to tax a higher amount in 2023/24. If you choose to tax more and accelerate the spreading, you should include a note on your tax return in the ‘Any other information’ box. 

You will need to report the following on your tax return: 

• Transition profit 
• Overlap relief 
• How much transition profit, after deducting overlap relief, should be taxed in 2023/24 

The remaining transition profits will be spread and taxed over the next four years. If your business ceases before this time, any transition profit not yet taxed should be taxed in the year of cessation. 

What if you do not know your profits yet? 

It may be that your accounts for the second part of the tax year are not yet finalised, so you do not know the profits figure. In this case, you will need to calculation provisional figures by calculating what it is likely to be. 

You must note on your tax return that a provisional figure has been used and once you know the actual figure you will need to change your tax return. You can amend your tax return online within 12 months of the tax return deadline. 

Date published 7 May 2024 | Last updated 8 May 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

---