The tax authority, HMRC, has changed how they tax profits for the tax year 2023 to 2024. This change affects self-employed individuals and partnerships.   It starts from April 2024 if your accounting year doesn't end between 31st March and 5th April.  

HMRC wants Accounts to be prepared with years ending on 31st March or 5th April from 2024 onward.   If your accounting end date doesn't match the tax year or changed to match it, but you haven't received relief, you need to calculate overlap relief before working out transition profit.   If your accounting end date changed in the 2023/24 tax year to match the tax year, this also impacts reporting.  

You can find out your overlap relief using HMRC's online tool, usually within three weeks unless your affairs are complex.   From April 2024, HMRC will provide a calculator to work out transition profit and other necessary figures for the 2023-24 tax year. 

It remains to be seen how user friendly this will be.  You'll need your overlap relief amount to use this tool.   For the 2023 to 2024 tax year, businesses will be taxed on profits from the 'standard part' and the 'transition part' of the basis period.  

The standard part is the 12 months after your basis period for the tax year 2022 to 2023, typically your accounting period in 2022 to 2023.

The transition part starts after the standard part and ends on 5th April 2024, or your accounting date in 2023 to 2024 if it's between 31st March and 4th April 2024.

For example, if you prepare Accounts to 31st December each year, the standard part runs from 1st January to 31st December 2023, and the transition part runs from 1st January to 5th April 2024.

You need to report profits earned in each part of the basis period. If the Accounts align perfectly with the parts, you report profit as usual. Otherwise, you'll have to report profits from multiple sets of Accounts.

HMRC also reminds that 2024 is a leap year, so 29th February needs to be included when calculating taxable profit.

Additionally, if you're a farmer or creative artist, you shouldn't include transition profit when calculating your averaging adjustment, according to HMRC.

Transition profit after overlap relief will be spread over five years, starting from the tax year 2023/24 and ending with the tax year 2027/28.

At least 20% of transition profit after overlap relief must be taxed in 2023/24. If a business stops operating on or before 5th April 2027, any remaining transition profit after overlap relief must be taxed in the year the business ceases.

Delriene Smith

Boss Money Moves