Calculating the Transition Profit

Do we have a choice?

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If, for instance, accounts are normally prepared to 30 April, and accounts are prepared for the 23-month period from 1 May 2022 to 31 March 2024 for the 2023/24 tax return, would it be correct to calculate the transition profit as being 11/23 x (profit for the 23-month period)?

I understand that if accounts for the year to 30 April 2023 and accounts for the 11 months to 31 March 2024 are prepared, then the transition profit will be the profit of the 11-month period, which will almost inevitably give a different result.

Is there a free choice, when after all, the relative results of each “method” will be clear in most cases  when preparing the accounts in whichever way?  

Replies (22)

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By Matrix
24th May 2024 19:44

I think you need a standard part and a transitional part. This assumes you are looking to spread the profits and not just prepare accounts for a 23 month basis period.

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By Tax Dragon
24th May 2024 20:23

Tax law tells you how to determine your tax based on what you do. It doesn't tell you what to do.

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By songb1rd
24th May 2024 20:53

So Tax Dragon, are you saying that if I do accounts for the 23 month period, I would take 11/23rds of the profit as being the transition profit?

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By fawltybasil2575
25th May 2024 01:57

@ songb1rd (OP).

The answers to all 3 paragraphs of your initial question (interpreting the second paragraph as an implied question) are all "Yes".

The rules are beautifully explained in the article by Emma Rawson here:-

https://www.accountingweb.co.uk/tax/hmrc-policy/putting-the-record-strai...

[Please look especially at the paragraphs in Emma's article headed "The problem" and "The answer" - the example given by Emma matches the facts in your initial question].

Stepping nervously into Tax Dragon's shoes, to try to answer (on her behalf) the question addressed to her in your post at 20.53 yesterday, the answer is also "Yes".

One needs to crunch the figures for each of the two alternative approaches [ie (i) Accounts for "12 months to 30 April 2023" and then "11 months to 31 March 2024" or (ii) Accounts for "23 months to 31 March 2024".

One will readily see that, in order to maximise the transition profit [to thereby "push" taxable profits from 2023/24 to later years - which of course would not necessarily result in an overall taxation saving, taking all years into consideration, since different marginal tax rates may come into play] one would opt for alternative (i) if the profits for the 11 months to 31 March 2024 are greater PER ANNUM than the profits for the 12 months to 30 April 2023.

Basil.

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Replying to fawltybasil2575:
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By Tax Dragon
25th May 2024 06:10

My shoes suit you Basil. Though I wouldn't myself have worn them with that dress.

Emma asks and answers OP's very question in the "what now" section of her article.

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By lionofludesch
25th May 2024 08:58

I always prepared separate accounts when a period was being extended. It's a task of minutes to add them together to see if that would give a better tax profile.

Although, sometimes, you know what's going to be best before you start.

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By janelm
25th May 2024 16:31

Agree there is a free choice and both options should definitely be examined for tax efficiencies - as lion says, this is not time consuming in itself.

However, given that apparently HMRC couldn't be bothered to code any APIs or anything special for this one-off change of basis year, the software contortions to do 2 separate periods, rather than one long period, are far more convoluted. I was surprised that one of the biggest tax software providers advised in their webinar that generally people would want to use a single long period of account, regardless of tax consequences, as otherwise the extra time/hassle factor in completing the return would erode any minor tax savings. Hundreds of accountants on the call appeared to agree and voted to use a single period of account.

I am about to try my first two-accounting-periods tax return as there is clear advantage to a client with an unusually large tax bill this year for other reasons. You have to input all the figures for both periods on two sets of SE pages, but then pdf the first 12 month period and delete the pages for that period out of the software, and then enter relevant totals from that period on the transition period pages instead. Then attach the pdf of the period of account to the return when filing it. Aka, HMRC want something to happen, but want to make all of the hassle-factor our problem.

Per HMRC: “Where there is more than one set of accounts for 2023-24, separate Self Employment pages should be completed for each set of accounts. One set of Self Employment pages should be completed with details of the latest accounting period and FSE66 to FSE82 as appropriate, should be completed to arrive at the taxable profit for the basis period. Additional Self Employment pages for any other accounting periods should be submitted as an attachment with an explanation given in white space (additional information). Note: that where the pages do not include the full details of profits, expenses necessary to confirm the net profit the return does not satisfy the requirements of Section 8 TMA1970.”"

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By songb1rd
25th May 2024 17:56

To janelm (et al):
I have a (different) client's 2023/24 return ready to submit. For this one I've prepared accounts for the year to 31 December 2023 and for the 3 months to 31 March 2024.
On page SEF 1 boxes 8 and 9 shows 1 January 2023 and 31 March 2024 respectively (dates the books of account start and finish), then turnover and expenses for the fifteen month period in boxes 15 and 31 (page SEF2).
Then on page SEF4, in box 68, deduct the profit of the 3-month period to 31 March 2024, and in box 73.3, add one-fifth of this three-month profit.
I had thought of adding a note in box 103 (any other information) just to say that two sets of accounts were prepared and stating the profit for each period. Then again I wondered whether to or not. The return, as far as I can see, will trigger the correct tax liability...

Is it likely that a return completed thus be rejected?

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Replying to songb1rd:
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By janelm
25th May 2024 20:11

My current understanding, that if you are reporting one set of 15 month accounts on the tax return, then you should take 3/15ths of the profit as being transitional profit.

If you instead want to specifically take the 3 months to 31 March 2024 as being the transitional profit (not 3/15ths), then you should file as two separate sets of accounts, with the tedious pdf-ing of one set of accounts and workarounds as per HMRC guidance that I mentioned.

I think that you may manage to successfully file your way, but if you have prepared and shown 15 month accounts on the tax return then you should be putting 3/15ths of the profit into box 73.3 as transitional profit - i.e. if ever scrutinised this may be seen to be an error? Or possibly auto corrected?

Happy to be corrected though as I'm still getting to grips with it all.

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By songb1rd
27th May 2024 00:22

Hi Janelm
Can you point me to where HMRC's instructions re. pdf-ing/deleting the first 12 months can be found, please?

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Replying to songb1rd:
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By janelm
27th May 2024 12:14

It is quoted by TaxCalc, who I am assuming have one of the best understandings of all this:
https://kb.taxcalc.com/3372

I imagine it might be buried somewhere in here, but I have just spent ten minutes looking through hundreds of examples of not quite the right circumstances:
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim81200

It unfortunately seems that most guidance has focused on the overview of how to calculate things, but not on the box by box mechanisms by which we are supposed to correctly report it on the return.

LITR and others seem to confirm that any apportionment of profits from a long accounting period is supposed to be time-apportioned on a day or month basis.
https://www.litrg.org.uk/working/self-employment/calculating-self-employ...

As TaxCalc have been giving guidance on the more complicated method of dealing with 2 accounting periods, I imagine there are reasons why we are not supposed to do it as you suggest (although it definitely seems an easier approach!). Presumably HMRC want to see the detailed accounts for the short period that actually give the profit figure that you want to use, rather than give 15 month accounts and then a transition profit figure (before overlap relief) that is not 3/15ths of the detailed accounts filed.

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By songb1rd
27th May 2024 17:08

I've asked my software provider (Ftax) if they have specific instructions for dealing with the "two sets of accounts/two SEF's" scenario. It's being passed to their tax expert who'll be back in the office tomorrow...

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By susieq
28th May 2024 15:32

Finally had a reply from taxfiler about inputting transitional profits (asked back in April) and this is the reply:

SA103:

• Please enter the full accounting period within Boxes 8 and 9 of the SA103 pages, entering this within Start of accounting period and End of accounting period.
• Then for the values within boxes 15 to 65 of the SA103 pages, enter the values in the software for the whole accounting period.
• Please then enter the necessary basis period dates into Boxes 66 and 67 of the SA103 pages, entering this within Date basis period began and Date basis period ended.
• What then needs to happen is that you need to find out how much of the accounting period’s total Net business profit/(loss) or tax purposes within the accounting period falls within the Transition part of the basis period and apportion the Net business profit/(loss) or tax purposes value to find out this value and this will be the value the you should enter within Profit/(loss) of the transition part of the basis period. (This will be the step 2 value within the transition profit calculation https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim81290)
• You then have to enter the exact opposite value within Adjustment to arrive at profit for the basis period to populate Box 68 on the SA103 pages, so if my Profit/(loss) of the transition part of the basis period is a positive value, then my Adjustment to arrive at profit for the basis period needs to be the exact same value but a negative value (and vice versa). (The Net business profit/(loss) or tax purposes after whatever the Adjustment to arrive at profit for the basis period is should be the step 1 value within the transition profit calculation)
• The rest of the boxes you should still calculate and populate in the same way. So Total transitional profit should be Step 5 within the transition profit calculation before it has been treated for how much is arising in the tax year (i.e. the lesser of either step 3 or 4). Transitional profit taxable is then the step 5 value after being treated for how much is arising in the tax year (this is what will populate Box 73.3).

SA104:

• Please enter the full basis period within Boxes 6 and 7 of the SA104 pages, entering this within Date basis period began and Date basis period ended.
• Then for the value within boxes 8 of the SA104 pages, enter the value within Share of profit/(loss) of the software for the whole period.
• What then needs to happen is that you need to find out how much of the accounting period’s total Share of profit/(loss) within the period falls within the Transition part of the basis period and apportion the Share of profit/(loss) value to find out this value and this will be the value you should enter within Profit/(loss) of the transition part of the basis period. (This will be the step 2 value within the transition profit calculation https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim81290)
• You then must enter the exact opposite value within Basis period adjustment to populate Box 9 on the SA104 pages, so if my Share of profit/(loss) is a positive value, then my Basis period adjustment needs to be the exact same value but a negative value (and vice versa). (The Share of profit/(loss) after whatever the Basis period adjustment is should be the step 1 value within the transition profit calculation)
• The rest of the boxes you should still calculate and populate in the same way. So Total transitional profit should be Step 5 within the transition profit calculation before it has been treated for how much is arising in the tax year (i.e. the lesser of either step 3 or 4). Transitional profit taxable is then the step 5 value after being treated for how much is arising in the tax year (this is what will populate Box 16.3).
• As for Boxes 28-80 relating to untaxed income, the user should enter the figures from the partnership statement and adjust them if required for the basis period. In this scenario adjustments are unlikely as the partnership statement figures cover the whole basis period.

Below is an example AP: 01/01/23- 31/03/24 (Extended. But this should apply to any extended period)

SA103:

• What dates go in Boxes 8 and 9? - 01 01 2023 and 31 03 2024
• What values are reported in Boxes 15 to 65? Is this for the full account period 01/01/23- 31/03/24? - Yes
• What are the dates to go on Boxes 66 and 67? - 01 01 2023 and 05 04 2024
• Is there a need for any adjustments to be entered in Boxes 68 and 71? - Box 68 yes – the profit of the transition part will need to be removed with a negative entry at box 68 (or a positive entry for a loss). Box 71 no – this relates to changes between traditional accounting and cash basis

SA104:

• What value goes into box 8? Is this for the full account period 01/01/23- 31/03/24? - Yes
• What are the dates to go on Boxes 6 and 7? - 01 01 2023 and 05 04 2024
• Is there a need for any adjustments to be entered in Boxes 9 and 10? - Box 9 yes – the profit of the transition part will need to be removed with a negative entry at box 9 (or a positive entry for a loss). Box 10 no – this relates to changes between traditional accounting and cash basis
• When there is untaxed income what values are reported in Boxes 28 – 80? - As the instructions for the boxes state: enter the figures from the partnership statement and adjust them if required for the basis period. In this scenario adjustments are unlikely as the partnership statement figures cover the whole basis period.”

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Replying to susieq:
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By janelm
28th May 2024 16:23

Those instructions look fine for filing one long period of account, and time-apportioning the profit between standard profit and transition profit.

However, they do not address how to file for two accounting periods where you want the specific shorter period of account profit to be used for transition profit rather than a time-apportioned transition profit.

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Replying to janelm:
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By susieq
28th May 2024 16:40

Exactly - I've replied to say this but it has taken them a full month to reply so I don't anticipate an early response, if at all. I've tried to follow the instructions by adding together the two sets of figures (which I really don't want to do) and still can't get it to tax 1/5 of transitional profits this year . Going to find a brick wall and beat my head against it now.

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Replying to susieq:
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By Matrix
28th May 2024 16:50

Well done, they just sent me the link to the SA completion notes.

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By songb1rd
29th May 2024 16:32

And I too have received a reply, from Ftax, pointing me to https://www.gov.uk/guidance/changes-to-reporting-income-from-self-employ... (which only deals with the "one set of accounts"/apportionment method). I've asked that they research the "two sets of accounts"/accounts basis method and get back to me...

However I have done a successful "Test Submission" of the Return I described in my post of 17.56pm, 25 May.

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By songb1rd
30th May 2024 21:16

My software provider has given me the same advice as others, i.e. two SEF pages completed, one set, with "transition accounts", as part of the return and the other, twelve-month accounts, as a pdf attachment.

And the reference (an edited version of the latest reply):
"We receive regular updates from HMRC including list of special cases where you have to follow the workaround. You can google "Self-Assessment Individual Special Cases for online filing 2023 to 2024". The Word document is 21 pages long and this is item 8 on page 4".
The note at the end of the workaround in item 8 suggests that both SEF forms should include an analysis of expenses, whether or not the turnover is £85,000 or more.

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Replying to songb1rd:
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By lionofludesch
30th May 2024 21:52

Special case? Work around?

It's like no-one has ever submitted a return with two sets of accounts before.

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Replying to lionofludesch:
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By Matrix
30th May 2024 21:55

You delete one and attach it as pdf instead apparently so how is it not a workaround?

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By lionofludesch
30th May 2024 22:45

It's not a new scenario. It's been happening for a quarter of a century. Why do we suddenly need work arounds?

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Replying to lionofludesch:
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By Matrix
30th May 2024 23:03

I don’t know since I submitted before this was announced but there was no transitional relief if you had two periods added together.

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