Basis Period Reform: How to Handle the Transition Year on 2024/25 Self-Assessment Returns
Non-April year-ends: How transition profit, overlap relief & provisional figures affect 2024/25 self-assessment returns. Full guide.
·5 min read
Basis period reform was perhaps the least-discussed major change to come out of the Making Tax Digital programme, but for sole traders and partners with non-April accounting year ends, it has been the most complex to manage. The reform — phased in with a 2023/24 transition year and fully in force from 2024/25 — moved unincorporated businesses from being taxed on the profits of their accounting period ending in the tax year to being taxed on a full April-to-April basis.
The 2024/25 return, which is due for filing by 31 January 2026 under self-assessment (or quarterly under MTD ITSA for those in the first cohort), is therefore the first “clean” year under the new system. But the transition year calculations from 2023/24 — specifically the overlap profit and overlap relief — feed directly into the 2024/25 position, and errors in that transition work will produce incorrect 2024/25 returns.
What the Reform Did and Why It Matters
Before the reform, unincorporated businesses were taxed on the profits of the accounting year ending within the tax year — so a business with a 31 December year end was taxed in 2024/25 on the profits for the year ending 31 December 2024. This produced a nine-month lag for most non-April businesses between earning profits and being taxed on them.
The old system also generated “overlap profits” — profits that were taxed twice when a business changed its accounting period or when the business ended. Each business with a non-April year end accumulated overlap profits at the point they started trading, and those overlap profits sat in the background for potentially decades until the business ceased.
The new system taxes all unincorporated businesses on actual profits earned in the tax year — April to March. The 2023/24 transition year was used to align accounting periods with the tax year, with a “transition profit” calculation that spread additional profits (arising from the alignment) over five years, and which drew down historic overlap relief accumulated under the old system.
From 2024/25 onwards, every unincorporated business is taxed on profits for the period April to March, regardless of its accounting year end.
The 2024/25 Position for Non-April Year-End Businesses
For a business with, say, a 31 December year end, the 2024/25 tax return covers profits for the period 6 April 2024 to 5 April 2025. This is not a period that matches the client’s accounts. In practice, the figures are compiled by taking the accounts for the year ending 31 December 2024 and adjusting them to cover the correct tax period.
The three components for a non-April year-end business in 2024/25 are typically: the nine months to 31 December 2024 from the 2024 accounts; the three months from 1 January 2025 to 5 April 2025 from the 2025 accounts (often on an estimated or provisional basis if the 2025 accounts are not yet complete); and any continuing instalment of the 2023/24 transition period spread.
The transition profit spread is the portion of the additional profits from the 2023/24 alignment that was deferred and is being recognised over five years (2023/24 to 2027/28). This instalment must be correctly identified and included in the 2024/25 return, in addition to the regular trading profits for the period.
Overlap Relief: What Must Be Checked
Overlap relief — the residual balance of overlap profits accumulated under the old system — was the subject of extensive HMRC guidance during the transition year. In 2023/24, businesses with accumulated overlap profits were required to use all remaining overlap relief against the transition profit calculation.
For most businesses, the 2023/24 return should therefore show zero overlap relief remaining after application. The 2024/25 return does not involve further overlap relief — it is a clean year under the tax-year basis.
The compliance risk arises where: the 2023/24 transition calculation was done incorrectly (wrong overlap profit figure used, arithmetic errors in the transition profit calculation, incorrect spreading election); or where the overlap relief figure used in the 2023/24 return was different from HMRC’s records. HMRC maintains overlap profit records for all businesses that accumulated them, and it will cross-reference the figure used in the 2023/24 transition calculation with its own records.
Where there is a discrepancy, HMRC may raise an enquiry into the 2023/24 return, which will have knock-on effects on the 2024/25 position if the transition calculation is corrected. For practices that have not verified the overlap profit figure used in each client’s 2023/24 transition year calculation against HMRC’s records, this is worth doing before filing the 2024/25 return.
Provisional Figures and the 2025 Accounts
For clients with non-April year ends who file on time (before 31 January 2026 for the 2024/25 paper return), the second half of the tax year typically falls within an accounting period that is not yet finalised — because the accounts for the year ending December 2025, March 2025, or another non-April date may not be complete by the filing deadline.
HMRC allows the use of provisional or estimated figures in self-assessment returns where the final figures are not available at the time of filing, provided the return is amended once the actual figures are known. For non-April year-end businesses, this means the initial 2024/25 return may include estimated figures for the period after the most recent accounting year end, with an amendment to follow when the next set of accounts is finalised.
Practices managing clients in this position should have a process for flagging which 2024/25 returns include provisional figures, when the final figures will be available, and what the amendment process looks like. Leaving provisional figures permanently in a filed return — without amendment — is a compliance failure.
BrightTax supports the self-assessment return workflow for unincorporated businesses, including the basis period and transition profit calculations required for non-April year-end clients. The first cohort of MTD ITSA clients with turnover above £50,000 are now submitting quarterly updates and end-of-period statements through BrightTax-compatible workflows, with the underlying calculations maintained accurately for the tax-year basis.
Frequently Asked Questions
What is the tax year basis and how does it affect the 2024/25 return?
What is the tax year basis and how does it affect the 2024/25 return?
Under the tax year basis (in force from 2024/25), unincorporated businesses are taxed on the profits earned in the period 6 April to 5 April, regardless of their accounting year end. For a business with a non-April year end, the 2024/25 return covers profits for the period 6 April 2024 to 5 April 2025 — which will need to be compiled from parts of two accounting years.
What is transition profit and does it appear on the 2024/25 return?
What is transition profit and does it appear on the 2024/25 return?
Transition profit was generated in the 2023/24 tax year when businesses with non-April year ends aligned their accounting periods with the tax year. Excess profits from the transition (after applying remaining overlap relief) were spread over five tax years (2023/24 to 2027/28). The 2024/25 return will include the second annual instalment of this spread unless the business elected to accelerate or decelerate the spread.
Is overlap relief still relevant for 2024/25?
Is overlap relief still relevant for 2024/25?
No. Overlap relief should have been fully utilised in the 2023/24 transition year calculation. The 2024/25 return does not involve overlap relief — it is a clean year under the tax-year basis. If a business’s 2023/24 return shows unused overlap relief carried forward, this may indicate an error in the transition calculation that needs to be corrected.
How should practices handle non-April year-end clients whose 2025 accounts are not finalised at the filing deadline?
How should practices handle non-April year-end clients whose 2025 accounts are not finalised at the filing deadline?
HMRC allows provisional or estimated figures in self-assessment returns where the final figures are not available at the time of filing. The return should be filed with the best available estimates and amended once the actual figures from the finalised accounts are known. Practices should track which returns include provisional figures and ensure amendments are made promptly.
What if the overlap profit figure used in the 2023/24 transition was different from HMRC’s records?
What if the overlap profit figure used in the 2023/24 transition was different from HMRC’s records?
HMRC maintains overlap profit records and will cross-reference the figure used in the transition calculation with its own data. A significant discrepancy may result in an enquiry into the 2023/24 return. The practical step for practices uncertain about the overlap figure used for any client is to check HMRC’s records (available through the self-assessment record) and compare with the figure used in the return. Any correction is best made proactively through an amendment rather than in response to an HMRC query.
Does basis period reform affect companies?
Does basis period reform affect companies?
No. Basis period reform applies only to unincorporated businesses — sole traders and partners in partnerships. Limited companies continue to be taxed on the profits of their accounting period, which can end on any date. The reform was specifically aimed at aligning the timing of self-assessment and income tax payments for unincorporated businesses.
BrightTax supports the self-assessment and MTD ITSA return workflow for unincorporated businesses, including the basis period and transition profit calculations required for clients with non-April accounting year ends. Find out more about BrightTax or speak to your account manager.
This content may have been developed with the assistance of AI tools. Content is reviewed by a member of the Bright team before publication. Guidance on legislation can be obtained from your industry body.
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