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Bedlam ahead with HMRC’s new basis period tool for sole traders

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Walking Amy Chin through the new HMRC basis period tool for sole traders and self assessment calculator, Tim Good highlights some of the potential pitfalls and attempts to cut through the confusion.

24th Apr 2024
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The 2023/24 self assessment season opened on 6 April 2024. This is the first year in which profits need to be reported to the tax year end, as basis period reform kicks off with 2023/24 dubbed “the transition year” by HMRC. 

Sole traders can access a gov.uk interactive tool to help them navigate the changes. According to HMRC, the tool will help sole traders complete their 2023/24 self assessment tax return correctly based on the details they provide about their business, profits, losses and other information. Despite this claim, once the tool spits out the figures, the guidance on where on the self-employment pages of the tax return they should go is hard to find and unclear. 

This, as well as ambiguous and inconsistent wording of some of the questions within the tool, is likely to cause confusion for taxpayers and accountants. “I predict bedlam later this month!” says director of PTP Ltd and Absolute Accounting Software Ltd, Tim Good.

Going through the online tool and self assessment calculator, checking figures against Absolute’s Taxpert calculator, which taxpayers can use to calculate their monthly and/or annual tax liabilities, Good highlights some of the potential pitfalls and attempts to cut through the confusion.

Smooth start

The first few questions of the online tool are simple – were you self-employed in the tax year 2023/24? Did your business start before 1 April 2023? Did it cease before 6 April 2024? There follows a series of questions requiring various start and end dates. Most of these are fairly straightforward as long as you follow the examples given and don’t agonise over the wording.

For the purpose of testing the tool we have chosen an accounting period (AP) end date of 31 December, in line with the examples given within the tool.

Bumps in the road

The first stumbling block for some will be the question: “What is your accounting period end date for the tax year 2023 to 2024? If you had two accounting periods for the tax year 2023 to 2024, enter the end date of the first one.”

Why would there be two accounting periods? The customary hyperlinked question mark to access further guidance is nowhere to be seen, but Good explains: “One must assume this would arise where a business chooses to change their accounting period end to match the tax year end” as many, but by no means all, businesses are opting to do this year. In this scenario the first AP end would be 31 December 2023 and the second 31 March 2024. 

Next we must input the profit (or loss) for the year to 31 December 2023 and any adjustments for capital allowances, disallowed expenses and so on. We used £120,000 with no adjustments.

Clear as mud

As we are sticking with a 31 December year end, the next question is curious: “What is your second accounting period start date for the tax year 2023 to 2024?” As there is no second AP ending in 2023/24, my first instinct is to leave this blank, which I try but computer says “no”. Luckily, the example again sheds some light so I obediently plug in 1 January 2024, only to be stumped again by the next question: “What is your second accounting period end date for the tax year 2023 to 2024? Your second accounting period must end on or after 31 March 2024. For example, 31 December 2024.” Despite the fact that any date after 5 April 2024 is actually in the tax year 2024/25, we stick with the plan to follow the example, not the wording of the question, and enter 31 December 2024. Were it not for the example, you’d be forgiven for wrongly putting 31 March 2024 in this box. It is, in Good’s words, “clear as mud”.

Getting tense

Although not mentioned anywhere in the tool, for the next stage you need to grab your crystal ball. Or at least undertake some forecasting. Not that the question acknowledges this: “Did you make a net profit or a net loss from 1 January 2024 to 31 December 2024?” and “What was your net profit?” Of course, to accountants and some unrepresented taxpayers who are well versed in the requirement to estimate profits for the second AP under basis period reform this will not come as a shock and they will input their estimate. We went for £200,000. But given the tool is designed to help unrepresented sole traders, a word or two (“estimated” for example) of clarification within the question and perhaps a change in tense wouldn’t go amiss.

Once our example overlap profits of £15,000 have been plugged in – helpfully there is a link within this question to HMRC’s overlap relief tool – the calculator spits out transitional profits of £37,459. This, as explained onscreen, will be spread equally over the next five years, £7,491 per year, unless the taxpayer chooses to accelerate

So far, albeit broadly correct, the online tool has taken two chartered accountants, one a renowned tax expert, a considerable amount of time to wade through, ultimately producing nothing other than the fairly basic calculation of £200,000 x 96/366 less £15,000 overlap relief and dividing the result by five. Best not to dwell on how much of HMRC’s budget was spent on building it.

Anticlimax

The next question gives a glimmer of hope that the tool may actually be useful: “How are you sending your 2023 to 2024 tax return to HMRC? Online or by post?”

HMRC has a stellar opportunity to provide real value by indicating which of the new boxes on the self assessment form each of the figures calculated belongs in. Alas, however, the subsequent page simply repeats the results of the simple calculations, giving no guidance as to where those figures should go. “Update the self-employment section of your 2023 to 2024 online tax return with your results” is the only pointer offered.

Further digging uncovers a poorly labelled link to "preview your results" which does show the answers against headings that correlate to the wording on the SA return, but does not give the box numbers.

Instead of the new tool, Good advises performing the simple calculation (estimated profits for AP ending in 2024/25 x number of days of that AP to 5 April 2024/366) and using this less shiny, but infinitely more useful HMRC helpsheet to work out exactly where the figures need to go.

Filling in the SA return

The boxes relating to basis period reform are boxes 66 to 76 on the self assessment (SA) return. The section refers to your “basis period” and asks for start date (box 66); end date (box 67); adjusted profits for 2023/34 (box 73); and total taxable profits for this period (box 76). The absence of any guidance as to which period(s) should be included here is perplexing. Is it the standard AP or the total period to be taxed in 2023/24, including in, our example, the three months to 31 March 2024? Using the helpsheet and checking the resulting calculation with Taxpert, Good has determined that it should be the former.

66: 01.01.23

67: 5 April 2024

73: £120,000

76: £120,000

Transitional profits in our example should be entered in the following boxes:

73.1: total transitional profits of £52,459

73.2: overlap relief of £15,000

73.3: spread of transitional profits £7,491

Shortcut to more confusion

Once completed using our test figures, the self assessment calculation matched Taxpert’s. But the taxation of the £7,491 transitional profits appears high at 55% (see screenshot below). On closer investigation, Good explains this is a programming shortcut: “The personal allowance taper takes transitional profits into account. As the £120,000 profit for the first 12 months is shown separately, the tapered personal allowance is £2,570. With the £7,491 transitional profits included, the personal allowance is reduced to zero. The tax applied to the £7,491 does take this into account, but it is not intuitively obvious.”

That basis period reform will be a headache for sole traders, partners and accountants is old news. The simplest option, where practical, would be to change the AP to match the tax year. Where this cannot be done, a wealth of resources can be found on HMRC’s YouTube channel: Get help with basis period reform and on gov.uk, as well as many useful articles on the various factors to consider, such as this one on AccountingWEB. Time would be better spent reading and digesting these than churning through the new interactive tool.

This article is based on a simple scenario with no change of accounting date. The scope for misunderstanding and errors will increase considerably with more complex circumstances. 

Stop press!

As this article was being published, HMRC released a new list of special cases for online filing and exclusions 53 to 57 recognising that in various scenarios (especially where there is a transitional period loss) it is not possible to file online and agents and taxpayers are offered workarounds. This makes the whole process of dealing with this year's basis period reform even more of a Rubik's cube.

Self assessment tax calculation example
Amy Chin

Replies (18)

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By Ardeninian
23rd Apr 2024 16:39

If you click "preview your results" on the last page you get the box-by-box breakdown you're looking for. This should give the correct answers for your example: in particular, box 67 should be 5/4/2024, and box 73.1 should be £52,459.

Thanks (3)
Replying to Ardeninian:
Richard Hattersley
By Richard Hattersley
24th Apr 2024 08:51

Thanks for your comment. New changes came to light after we published the article, so we have updated the piece to reflect those.

Thanks (2)
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By Geoff56
24th Apr 2024 09:56

"As this article was being published, HMRC released a new list of special cases for online filing and exclusions 53 to 57 recognise that in various scenarios (especially where there is a transitional period loss) it is not possible to file online and agents and taxpayers are offered workarounds."

Please can you provide a link to this? Thanks.

Thanks (1)
Replying to Geoff56:
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By Amy Chin
24th Apr 2024 10:08

Hi Geoff,

It's a word document that's been shared with software developers but not made public as far as we're aware. We will try and find a workaround to share a link.

Thanks (1)
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By Nick Belton
24th Apr 2024 10:40

If you're making amendments to the original article can you also change "rubix cube" to "Rubik's Cube"?

Thanks (4)
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By Nickob
24th Apr 2024 10:47

It seems grossly unfair that the transitional profits will force many taxpayers into the 60% tax bracket. Not only is HMRC accelerating tax receipts with the change of basis of assessment, but taxing these profits, which would normally have been taxed at 40%, at the highest possible rate.

Thanks (3)
Replying to Nickob:
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By rmillaree
24th Apr 2024 11:38

to be fair to hmrc this was well flagged up and those peope had the benefit of "perhaps" being able to avoid 60% tax earlier on. Everyone who has actively decided to go down this route will have known the score so i see very little unfairness particularly if one factors in the ability to smooth out numbers . Obviously some will be hit hard and i am not without sympathy - in that regard anyone earning 100k a year who doesnt plan on the tax front is probably missing a trick - the easy obvious answer if needs be is to find the cash to add to pension. Albeit there are probably too many people who have spent their 100k profits before they have earned them for my liking offering themseles limited options ref flexibility - in that regard they may be making life difficult for themselves.

Thanks (0)
By mydoghasfleas
24th Apr 2024 10:51

It does make you wonder who in, or rather if, HMRC reviews these tools and the text accompanying them. Whoever writes the script knows what they mean. If it is not reviewed by someone who has no idea what it is about, then the original writer's belief is affirmed.

Tim Good knows what it meant to happen so can review with that understanding and pick out the obvious. The unrepresented will plough in and after multiple attempts either give up; make entries, right or wrong, to make it work; or spend time ringing helplines that are either manned with hold times measured in geological epochs, unmanned due to staff working from home and out walking the dog, unmanned because HMRC asserts you can find the answer online (you probably can just not on the GOV.UK site).

Just another SNAFU

Thanks (4)
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By rmillaree
24th Apr 2024 11:30

we need an article with changed year end covering boxes 64 and box 68.

I have some pretty knowledgeable people saying box 64 should be adjusted so figures exclude the transitional period others are saying the full period profits go in box 64 and the transitional period profits are adjusted out at box 68 - both methods come up with the same results. I have had a wall of silence from my software provider and croner out tax experts as to which to use - and there is no clear concise guidance here that i can find that would clarify - the answer may be in the detail of the tax calc workings perhaps.

what is ridiculous is that this is this an easy known adjustment and hmrc cant communicate CLEARLY what to do in the relevant notes section - i supect of guidance is sketchy this has sent iris into meltdown as they cant answer any question sdespite being probably the biggest provider.

sigh - i may have missed something obvious in this regard

Thanks (2)
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By Abacus 155 Limited
24th Apr 2024 12:02

I have been advised (by a tax helpline) that to qualify for the 5 year spreading of the transitional profit you must keep the same period end for the 24/25 year and if you do shorten it to March 24 then the 100% additional profit will be included in the 5/4/24 tax return, rather than 20% . The examples i have seen in this article and some others seem to imply that changing to March 24 is the best option which from what i have been advised would not be the case. It would mean more tax to HMRC in the short term but surely HMRC would not do that.
Any views on whether my understanding is correct ?

Thanks (0)
Replying to Abacus 155 Limited:
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By Ardeninian
24th Apr 2024 12:15

You need to change your tax helpline! Spreading is available whether you change your accounting date or not

Thanks (4)
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By FactChecker
24th Apr 2024 14:01

"rubix cube"?
Hint: it was invented by Ernő Rubik. Only mentioned because the tenor of the article (with which I fully agree) is all about precision, taking care and checking before release!

The interesting, and unexplored, aspect is WHY it appears that HMRC no longer bother with the minor pre-release step of asking a small group (a mix of experts, regular professionals and some ordinary taxpayers) to each attend a one-on-one session where their interaction with the new software, and suggestions, are captured (on camera and audio, with a 'helper' on hand when truly stuck)?

I used to be one of the guinea pigs on several such pre-release 'tools' (from ones to register for Payrolling Benefits to online Agent registration etc) ... and, although a few of the helpful feedback items were 'lost' (possibly deliberately?), a lot of the prosaic ones were quickly fed into the version before release.
In particular, these improvements were on exactly the types of issue illustrated above (lack of clarity in wording / missing links to expand on the underlying meaning / better references between any worked example and what you should see appear in front of you / etc) - i.e. in good old fashioned jargon ... useability!

If they could do that for tools that (whilst important) had relatively limited impact on taxpayers, then why not treat something like this (which could have catastrophic impacts for many) with any less effort & rigour?
The answer I fear is that poisonous phrase 'agile development', which is banded about by those holding the purse strings as some magic key that saves money - whilst actually storing up bigger problems for tomorrow. But that, as they, is a different story!

Thanks (3)
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By AndrewV12
25th Apr 2024 10:08

Wish me luck, nice knowing you lot.

Thanks (0)
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By Mark Cripps
25th Apr 2024 13:01

Could somebody kindly explain how overlap relief will impact on the double tax charge in the year, and do we know if HMRC have the available figure for overlap relief, which can be missing if the client has changed agent, which is extremely likely over such a long time period.

Thanks (0)
Replying to Mark Cripps:
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By rmillaree
25th Apr 2024 13:43

sure
brief summary

say you have overlap profit bf of 5k

and say your profit for the period after 12 months up to 5/4/2024 are 30k
eg ye 30/11/2022
this year you are doing 01/11/2022-5/4/2024
the first 12 months to 30/11/2023 would be taxed as normal

so 30k if profit for period 1/12/2023-5/4/2024
take off overlap bf of 5k

so 25k left - and thats spread over 5k years - 5k per year on top albeit you can accelerate treatment if you wish.

so if you are on 90k income and 5k was going to come in this year you could bring in 10k to get to 100k - so only 15k for future years rather than 20

thats very simplistic there may be other options to mitigate - that may depend on future profits though - if profits are very lump it may be better or worse changing years end - really you ned to do full calcs to see if its ok

Thanks (1)
Replying to Mark Cripps:
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By Amy Chin
25th Apr 2024 14:40

You should be able to request details of overlap relief using HMRC's interactive tool - see more in this article:

https://www.accountingweb.co.uk/tax/hmrc-policy/delayed-overlap-relief-f...

Thanks (0)
Replying to Amy Chin:
Morph
By kevinringer
03rd May 2024 15:47

I submitted one of these on 12 September last year. I'm still waiting to hear from HMRC. Why did HMRC force Basis Period Reform on themselves when they don't have the resources to cope with it?

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