How FreeAgent apportions income and expenses for sole traders

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 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 need to submit provisional figures to HMRC on your Self Assessment tax return.

Please note:

  • The information in this article currently only applies if you have a sole trader account type and your accounting year is different from the tax year.

  • If your accounting year is the same as the tax year (5th April, or by concession 31st March or any of the first four days in April), you'll submit your business's income and expenses for the tax year as normal.

  • We are not authorised by HMRC to provide accounting or tax advice. Therefore, FreeAgent’s Support team cannot advise you on how to fill in your tax return correctly or check your figures to see if they are correct, unless they have been calculated by the software. If you’re unsure whether a figure on your tax return is right, please speak to your accountant or to HMRC.

An introduction to basis period reform for sole traders

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 usually 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 up to 5th April 2024. This is known as the transition profit. Don’t worry - if you have a sole trader account type, then FreeAgent will calculate both the standard and transition profit figures for you.

From 2024/25 onwards, if your business’s accounts are not prepared up to the end of the tax year (5th April, or by concession 31st March or any of the first four days in 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. FreeAgent will calculate this going forward for customers with a UK sole trader account type.

Basis period reform transition year 2023/24

During the transition year, 2023/24, you’ll be taxed on the profits of the ‘standard part’ and the ‘transition part’ of your basis period.

Your standard part is the 12-month period beginning immediately after the end of your basis period for tax year 2022/23. Your transition part is the period that begins immediately after the end of the standard part and ends on 5th April 2024.

For example, in the 2023/24 tax year, a business with a December 31st year end that’s been trading for a number of years will pay tax on:

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

FreeAgent will calculate these for you if you have a UK sole trader account type, but you can overwrite FreeAgent’s figures if your accountant advises you to.

The taxable profit will be calculated in box 64 of the Self-employment page.

Screenshot of taxible profit in box 64.png

Any adjustment needed to apportion your taxable profit from two accounting years to the standard part of the basis period will be calculated in box 68 on the Self-employment page. If you’ve been trading for a number of years, you may find that no adjustment is needed here, because your accounting year will be the same as the standard part of the basis period.

We’ll take the example of a business with a 31st December year end that began trading on 1st March 2022. Because its basis period for 2023/24 would begin on 1st March 2023, the standard part of its basis period for 2023/24 will run from 1st March 2023 to 29th February 2024, meaning it will contain part of the profits for two accounting years. FreeAgent will calculate this by first:

  1. Multiplying the profit from the first accounting year partly covered by the standard part (1st January 2023 - 31st December 2023) by the number of days from the start of the basis period to the end of the first accounting year (1st March 2023 - 31st December 2023) and dividing by the number of days in the full accounting year.

    In the example above, if your profit for the first accounting year partly covered by the standard part was £8,000, this would be multiplied by 306 and divided by 365 to give a profit of £6,706.85 for the element of the standard part that falls within the first accounting year.

  2. Multiplying the profit from the second accounting year partly covered by the standard part (1st January 2024 - 31st December 2024) by the number of days in the standard part of the basis period for 2023/24 (1st January 2024 - 29th February 2024) and dividing by the number of days in the full accounting year.

    In the example above, if your profit for the second accounting year covered by the standard part was £12,000, this would be multiplied by 60 and divided by 366 to give a profit of £1,967.21 for the element of the standard part that falls within the second accounting year.

  3. Adding the two figures together to calculate the total profit or loss for the standard part, and then calculating any adjustment needed between that and the taxable profit from box 64.

    In the example above, the profit for the full standard part of the basis period would be £8,674.06 (£6,706.85 + £1,967.21).

  4. FreeAgent will then subtract the adjustment figure from the amount in box 64 (if the business made a profit in its early years) or box 65 (if the business made a loss in its early years).

    In the example above, the adjustment figure would be £674.06 (£8,674.06 - £8,000).

Screenshot of an example of the adjustment calculation in box 68.png

Your taxable profit in box 64 and any adjustment in box 68 will be added together to calculate the adjusted profit for the standard part of your basis period in box 73 on the Self-employment page.

In the example above, the adjusted profit would be £8,674.06 (£8,000 + £674.06).

Screenshot of an example of the adjusted profit figure in box 73.png

Boxes 73.1 to 73.4 only need to be completed if you have a basis period transition profit or loss. If you’re unsure whether you need to complete these, please see HMRC’s guidance or speak to your accountant.

Box 73.1 apportions the profit or loss from your accounting year(s) to calculate the transition profit. In our above example, this would be the profit for the period 1st March 2024 - 5th April 2024.

For example, if your profit for the accounting year covered by the transition part was £12,000, this would be multiplied by 36 and divided by 366 to give a profit of £1,180.33 for the transition part of the basis period.

Screenshot of an example of the transition profit in box 73.1.png

You’ll need to take any profit you were taxed twice on in your early years of business (overlap relief) off your transition profit. If you’re not sure about what overlap relief you might be entitled to, please check HMRC’s guidance.

The overlap relief will be deducted in box 73.2. If you’ve been using FreeAgent for a while, you might see a figure calculated from previous years. You can overwrite this if your accountant advises you to.

Screenshot of an example of overlap relief in box 73.2.png

The transition profit can then be spread over up to five years, so you’re not taxed on it all at once. This happens at box 73.3.

Screenshot of an example of transition profit being spread in 73.3.png

Finally, you can set off certain losses against this year’s part of the transition profit. Again, please ask your accountant if you need any guidance with what figures to enter in boxes 73.4 and 74 for losses.

If you’re affected by basis period reform you’ll have more than one set of accounts for the basis period. FreeAgent will fill in boxes 1 to 65 and 83 to 99 as appropriate on separate ‘Self-employment (full/long version)’ pages for each set of accounts. Boxes 66 to 82 and 100 to 103 will only be completed for the most recent set of accounts ending on or before 5th April 2024 as per HMRC guidance. Details of accounts ending after 5th April 2024 don’t need to be submitted but are used to calculate your transition profit or loss.

Submitting provisional figures to HMRC

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 need to submit provisional figures to HMRC using full-year estimated figures.

These figures are estimates and must be submitted by the tax return filing deadline of 31st January. When the accounting year ends and the latter accounting figures have been finalised, you’ll need to send another submission to HMRC with finalised figures.

First, FreeAgent will check that your accounting year-end date doesn’t match the end of the tax year (5th April, or by concession 31st March or any of the first four days in April). If the end date of the following accounting year hasn't passed when you attempt to file the tax return, FreeAgent will notify you that you need to use provisional figures.

Screenshot showing warning that provisional figures are needed in FreeAgent.png

For example, if your accounting year runs from 1st January to 31st December and the second accounting year begins on 1st January 2024, the end date of the accounting period (31st December 2024) won’t have passed if you file your tax return for the 2023/24 tax year on 30th September 2024.

Box 20 on the Main Return page will be automatically set to ‘Yes’ if your accounting year end doesn’t match the tax year. Please note that in box 19, you must enter that you’re submitting provisional income and expenditure figures as your current accounting year hasn't ended yet (the accounting year to 31st December 2024 using the example above). You'll also need to enter when you expect to resubmit finalised figures to HMRC for the full accounting year.

Screennshot showing example of box 19 and 20 on Main return page.png

Next, you’ll need to enter the date that you want FreeAgent to use to calculate your provisional annual estimate figures, in the ‘Provision Figures’ section of the Self-employment page. When you file the tax return, FreeAgent locks your accounts to the selected date.

Screenshot showing example of provision figures section.png

How FreeAgent calculates provisional figures

Using the provisional date selected, FreeAgent will annualise the pre-filled income and expense boxes to get a full-year estimate, by performing the following calculation. Please note that any pre-filled capital allowance boxes will not be annualised.

  1. Determine the number of days from the start of the second accounting period to the end of the period.

    For example, if your second accounting year begins on 1st January 2024, there will be 366 days between 1st January 2024 and 31 December 2024.

  2. Determine the number of days from the start of the second accounting period up to the selected provisional date.

    For example, if you entered 30th September 2024 as the date to use to prepare your provisional accounts, there will be 274 days between 1st January 2024 and 30th September 2024.

  3. Annualise the figures based on the number of days in the second accounting period, by the number of days from the start of the second accounting period up to the selected provisional date.

    For example, if you received £20,500 income up to the selected provisional date of 30th September 2024, the estimated annualised income for the full year would be £27,383.21 (£20,500 x 366/274).

Submitting finalised figures to HMRC

If you’ve submitted provisional figures to HMRC, you then need to submit finalised figures once the second accounting year that overlaps the tax year has ended. The finalised figures must be submitted within 12 months after the tax return filing deadline of 31st January.

To do this, you must first unlock your Self Assessment tax return that contains the provisional figures that you sent to HMRC.

Once you’ve unlocked the tax return, make sure that box 20 on the Main Return page is set to ‘No’ and box 19 no longer states that you’re sending provisional figures.

screenshot showing box 20 set to No.png

When you’re happy that the figures are correct and the tax return is complete, you can re-file your amended tax return to send the finalised figures to HMRC. If you’re unsure, please speak to your accountant.

Did you find this article useful?