Self Assessment: the difference between accounting periods and basis periods
Your accounting period is a time period that you choose to run your accounts to (often a year). Your basis period is the time period that HMRC uses for tax. If your accounting year end doesn’t match HMRC’s tax year end, these periods can be different and cause overlap profits and overlap reliefs.
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Every business has to prepare its accounts for a year at a time, because you pay tax on a year’s worth of profit at a time. You’ll choose a date to prepare your accounts to each year. This is called your accounting year end date, year end date, or year end. The period that runs to a year end date is called your business’s accounting year if it’s a full year, or accounting period (which can be a year or a different span of time).
Many sole traders choose either 31st March or 5th April for their year end, because the tax year finishes each year on 5th April, and HMRC have said that accounts prepared to 31st March also count as being prepared for a tax year at a time. (This also covers accounts which are prepared to any of 1st, 2nd, 3rd or 4th April.)
Your basis period is the period that HMRC assess you to tax on. That’s nearly always the same as your accounting period, and if your accounting year end is the same as the tax year end, your basis period will always match your accounting period, until your business ends.
But if you prepare your accounts to a different date from the tax year, such as to 31st December, then you pay tax on the profit for the accounting year that ended within that tax year.
For example, if your year end is 31st December, then for the tax year 6th April 2021 - 5th April 2022, you will pay tax on the profit you made in the calendar year 2021, because your accounting year end date that falls between 6th April 2021 and 5th April 2022 is 31st December 2021.
Overlap profits and overlap relief
When your year end doesn’t match the tax year end, then in the early years of your business, special rules apply. Your basis period and your accounting period won’t be the same, and if your business is profitable, you’ll pay tax on the same profit twice (overlap profits) which you’ll only get back when your business changes its year end or closes (overlap relief).
If you’re not sure what date to pick for your year end, or when your accounting period and basis period are, speak to your accountant!