We are sharing this update from ACCA, our professional body, for the interest of clients and contacts. The content is (c) ACCA
Reporting on a tax-year basis and using estimates for overlap relief
From April 2024, sole traders and partners in businesses will be required to report their profits on a tax year basis, if they do not already do so. This change, known as basis period reform, is being implemented by HMRC to standardise profit reporting and align it with the official tax year, running from 6 April to 5 April the following year.
What is basis period reform?
The basis period reform requires businesses to adjust their accounting periods to match the tax year. Currently, many businesses use non-tax year accounting periods, which can complicate the reporting and calculation of profits. The reform is aimed at simplifying tax reporting, ensuring a consistent approach, and making it easier for businesses to comply with tax requirements.
Using estimates for overlap relief
As part of this reform, businesses may need to account for overlap relief — the amount of profit they have already paid tax on due to their previous accounting periods. HMRC has advised businesses that, if they do not currently have the exact figure for overlap relief, they should use an estimate when filing their returns. This estimate will allow businesses to meet the filing deadline of 31 January 2025.
Once the estimate is submitted, businesses have up to 12 months after the filing date to amend their tax return and submit the correct overlap relief figure if it differs from the estimate.
Additional support for basis period reform
To assist businesses with the transition, HMRC has provided additional guidance and resources on basis period reform through GOV.UK. A new tool has also been launched to help businesses calculate their overlap relief figure, and more detailed guidance to ensure businesses can manage the changes effectively is available.
Conclusion
HMRC’s basis period reform will affect many sole traders and partnerships. To help manage the changes, businesses should use estimates for overlap relief if they do not yet have the exact figure available. This approach will ensure they can meet the filing deadline of 31 January 2025 while still having time to correct the figures later if necessary.
For more information and to access the new calculation tool, businesses are encouraged to visit HMRC’s website.