The government announced in the Autumn Budget 2021 this has been implemented and starts coming into force in the 2023/24 tax year. Broadly, the intention is to tax profits that are time-apportioned to the tax year instead of the profits for the 12 months to the accounting date in the tax year. This reform affects individuals who are self-employed, including partners in trading partnerships, if their accounting periods are not aligned to the tax year (dates from 31 March to 5 April inclusive are treated as aligned to the tax year for this purpose). The changes are intended to take effect from the 2024/25 tax year, with transitional rules applying in 2023/24.
HMRC have said these new rules will simplify the system, as per usual it is down to us to navigate the complex set of rules and problems they have thrown up.

The current rules (“current year basis”)
For income tax purposes, trading profits of a tax year are generally based on the profits for the 12 month accounting period ending in the tax year (subject to adjustments for disallowed expenditure, depreciation etc). For example, if an individual draws their accounts to 31 December every year, the 2021/22 taxable profits would be based on the accounts for the year ended 31 December 2021. This is known as the “current year basis” and the period being taxed is the “basis period”.
Overlap profits do not arise if the accounting periods are all aligned to the tax year. For this reason, most traders choose accounting dates of 31 March or 5 April. If traders use alternative dates, they typically need to file their first return for the business using provisional figures as the accounts might not be final (e.g. if the first accounts run from 1 March 2021 to 28 February 2022, the tax return for 2020/21 is due on 31 January 2022, a month before the accounting period has finished). They also need to determine the overlap profits figure and report this on the tax return each year until it is relieved. It is the calculation and recording of overlap profits that the government is seeking to remove in these reforms.
The new basis from 2024/25 (“tax year basis”)
From 2024/25, taxable profits will be based on time-apportioned profits of the accounting periods that fall within the tax year. For example, if a trader draws their accounts to 31 December every year, their 2024/25 taxable profits would be based on 270/366ths of the 2024 calendar year profits and 95/365ths of the 2025 calendar year profits.
Whilst this is relatively simple on paper, it will cause difficulty in practice. The 2024/25 tax return (or digital equivalent) is due by 31 January 2026. Unless the business is very simple, it is unlikely that the trader will be able to finalise the accounts and tax adjustments for the 2025 calendar year accounts in time. It is therefore necessary to file based on provisional figures and then revise the return later once the true figures for the later accounting period are known. This exercise would be repeated every year thereafter.

Transitional rules in 2023/24
For traders whose accounting periods are not aligned to the tax year, and who do not cease trading in the 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 with a deduction for any unrelieved overlap profits. For example, 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, with a deduction for any unused overlap profits that arose in the opening years of trading. To the extent that this profit figure exceeds the profits for the first 12 months of the extended basis period, spreading provisions apply. These are called “transition profits”. Transition profits are spread equally over five tax years, including 2023/24, but the trader can elect to be taxed on them sooner. Any untaxed transition profits are taxed automatically on cessation of the trade.
Losses may arise in the transitional year if the unrelieved overlap profits exceed the profits for the extended basis period. To the extent that the loss has been generated by the overlap relief, extended loss reliefs may be available. The loss can be treated as a “terminal loss”, which can be carried back and set against profits of the same trade in the previous three tax years. Other loss reliefs may also be available.

Interaction with Making Tax Digital for Income Tax
HMRC state that this reform is needed in order to implement Making Tax Digital for Income Tax (MTD). Under MTD, businesses will be required to send quarterly digital updates to HMRC, based on transactions in tax year quarters, and provide a digital “End of period statement” to finalise the taxable profit for the tax year. For partnerships, this would include the allocation of the profits of the tax year to the relevant partners.
For most sole traders, MTD is mandated from 6 April 2026.