Apportioning income and expenses as a sole trader

This article explains how FreeAgent apportions income and expenses when your accounting year is different from the tax year. It also explains how FreeAgent calculates provisional figures for your tax return when the tax year overlaps two accounting years, if the second of those years hasn’t finished yet.

Please note:

  • The information in this article currently only applies if you have a sole trader account type.

From the 2024/25 tax year, sole traders will be required to include profits on their tax returns for the tax year, rather than their accounting year, in accordance with the basis period reform rules. There is a transition year in 2023/24.

During the transition year you’ll be required to calculate your standard profit. This is the profit you would have included on your tax return if basis period reform had not happened - typically the profit for your accounting year. Next, you’ll calculate the profit for the rest of the tax year. This is known as the transition profit.

You’ll need to deduct any profit on which you were taxed twice in your early years of business (overlap relief) from your transition profit. If you're unsure what overlap relief you're entitled to, please check HMRC’s guidance. The transition profit can then be spread over up to five years, so you’re not taxed all at once.

For example, in the 2023/24 tax year, a business with a December 31st year end will pay tax on:

  • standard profit (for 1st January 2023 - 31st December 2023)
  • transition profit (for 1st January 2024 - 5th April 2024)

Once basis period reform is in effect from the 2024/25 tax year onwards, if your business’s accounts are not prepared up to the end of the tax year (5th April), HMRC requires the income and expenses from two accounting years to be apportioned in order to calculate accurate figures for a single tax year.

If the tax year overlaps with two accounting years and the end date of the second accounting year hasn't passed when you file your tax return, you'll need to submit provisional figures to HMRC on your Self Assessment tax return.

We'll tell you more about how FreeAgent will help you work out your profit for the transition year as we build this functionality.

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