My VIP Tax Team question of the week: Basis period transition
I have sole trader currently with basis period ended 30 June, profits for 30 June 23 are going to be £80K and forecasted profits for 30 June 2024 are £60K. Overlap profits brought forward of £20K. Can you explain the profits calculation and collection of the additional tax under the basis period reform?

For the 2024 to 2025 tax year, sole traders and individual partners will have a basis period in line with the tax year, FA22 Sch. 1 Para 61

There is a transitional period in the 2023-2024 tax year to bring the basis period in line with the tax years for existing sole traders, partnerships who have not commenced the trade or ceased in the year.

The legislation breaks this into two parts, referencing one as the standard part and the other as the transition part. The standard part is the 12 months from the date of basis period ended in 2023-2023. The transition begins immediately after the standard part and ends on the date between 31 March to 5 April 2024, FA22 Sch. 1 Para 65

Your client will have the standard part as 30 June 2023 and transitional part of 1 July 23 to 5 April 2024.

The steps for calculating the transitional profits for the tax year are covered under paragraph 70. Any overlap relief brought forward will be available as a deduction from the transitional profits, FA22 Sch. 1 Para 68 and 69.

The transitional period will be spread over 5 years at a rate of 20% for each tax year, FA 22 Para 72(2) (3).

Please see below for your client’s tax calculation:

A calculation will be carried out to find the difference between income tax liability inclusive of transitional profits and one without to find the additional amount of tax due for each tax year. Para 75

You can make an election within the Self-Assessment amendment window for the profits not to be spread over 5 years but treat it as arising in the 2023-2024 tax year. FA22 Sch. 1 para 73(1) and (2)

Please see HMRC’s guidance at BIM81290 and the Croner-i Direct Tax Reporter at 230-250.

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David Lawson

David started his career in HMRC.  During his time, he conducted tax investigations into OMB’s and certain avoidance structures.  He has gained experience of working in practice for a couple of years before joining Croner Taxwise December 2020.  He is a member of the ATT.

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