Transitional rules in 2023/24- Actual basis for the tax year

HM Revenue and Customs implemented this change which is necessary for MTD.

For traders, including partnership  whose accounting periods are not aligned to the tax year the profits in 2023/24 will be based on the period from the end of the 2022/23 basis period to 5 April 2024. Unrelieved overlap profits will be may be available to reduce the combined taxable profit.

Overlap Profit

When self-assessment was first introduced some profit may have been taxed twice. This is known as overlap profit. HMRC  is making available information on overlap profit to assist with the transition.

If the trader draws their accounts to 31 December every year, the 2023/24 profits would be based on the whole of the 2023 calendar year accounts together with 96/366ths of the 2024 calendar year accounts. Overlap relief may  be available to reduce the taxable profit.

For the profit which exceeds the twelve months profit  the spreading provisions apply. These are called “transition profits”. The transition profits are spread equally over five tax years, including 2023/24 to be taxed though the trader can elect to be taxed on them earlier.

Without modification the transitional year  (2023-24) will adversely affect some taxpayers given the yearly tax threshold as for example  the £100,000 limit for the personal allowance taper and  the £60,000 limit for the High Income Child Benefit.

There is provision  in the legislation to prevent these problem. A stand alone computation for the  tax year removes these anomalies.