HMRC’s new Basis Period tool could cause chaos for Sole Traders.

The new HMRC basis period tool for sole traders and self assessment calculator is causing quite a stir. Here we examine some of the problems ahead and present some potential solutions to the confusion.

The 2023/24 self-assessment season, which began on 6 April 2024, marks the first year in which profits must be accounted for up to the tax year end, as the basis period reform, termed “the transition year” by HMRC, kicks in.

Sole traders can utilise an interactive tool on gov.uk to assist them in navigating the changes. According to HMRC, this tool will aid sole traders in accurately completing their 2023/24 self-assessment tax return based on the information they provide regarding their business, profits, losses, and other details. Despite this assurance, once the tool generates the figures, finding clear guidance on where they should be placed within the self-employment pages of the tax return proves challenging and unclear.

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

Navigating through the online tool and self-assessment calculator, cross-referencing figures against Absolute’s Taxpert calculator, which taxpayers can utilise to compute their monthly and/or annual tax liabilities, Good highlights some of the potential pitfalls and aims to clarify the confusion.

Seamless Beginning

The initial questions of the online tool are straightforward—were you self-employed in the tax year 2023/24? Did your business commence before 1 April 2023? Did it conclude before 6 April 2024? Subsequent questions involve various start and end dates, most of which are fairly simple if one follows the provided examples without getting caught up in the wording.

For the sake of testing the tool, we have selected an accounting period (AP) end date of 31 December, consistent with the examples provided within the tool.

Initial Challenges

The first hurdle for some arises with 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 might there be two accounting periods? The customary hyperlinked question mark for additional guidance is absent, but Good elucidates: “One must assume this would occur when a business opts to change its accounting period end to align with the tax year end,” as many 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 up to 31 December 2023 and any adjustments for capital allowances, disallowed expenses, and so forth. We used £120,000 with no adjustments.

Confusion Persists

As we are adhering to a 31 December year-end, the subsequent question is perplexing: “What is your second accounting period start date for the tax year 2023 to 2024?” Since there is no second AP ending in 2023/24, my initial instinct is to leave this blank, which I attempt, but the system rejects it. Fortunately, the example sheds some light, so I dutifully input 1 January 2024, only to be perplexed again by the subsequent 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 any date after 5 April 2024 technically falling into the tax year 2024/25, we adhere to the example rather than the wording of the question and input 31 December 2024. Without the example, one might incorrectly input 31 March 2024 in this field. It is, as Good puts it, “clear as mud.”

Tension Mounts

Although not explicitly mentioned in the tool, for the next stage, one needs to employ some forecasting or, at the very least, undertake some estimation. This isn’t acknowledged in the question: “Did you make a net profit or a net loss from 1 January 2024 to 31 December 2024?” and “What was your net profit?” Naturally, for accountants and some unrepresented taxpayers familiar with the requirement to estimate profits for the second AP under basis period reform, this will not come as a surprise, and they will input their estimate. We opted for £200,000. However, given that the tool is designed to assist unrepresented sole traders, a word or two (“estimated,” for example) of clarification within the question, and perhaps a change in tense, would be helpful.

Once our example overlap profits of £15,000 have been inputted—helpfully, there is a link within this question to HMRC’s overlap relief tool—the calculator produces transitional profits of £37,459. This, as explained onscreen, will be evenly spread over the next five years, amounting to £7,491 per year, unless the taxpayer opts to accelerate.

So far, although broadly accurate, the online tool has consumed the time of two chartered accountants, one of whom is a renowned tax expert, ultimately yielding nothing more than the rather basic calculation of £200,000 x 96/366, minus £15,000 overlap relief, and dividing the result by five. It’s best not to dwell on how much of HMRC’s budget was expended on constructing it.

Underwhelming Conclusion

The subsequent question provides a glimmer of hope that the tool might actually prove useful: “How are you submitting your 2023 to 2024 tax return to HMRC? Online or by post?”

HMRC has an excellent opportunity to offer genuine value by indicating which of the new boxes on the self-assessment form each of the calculated figures pertains to. Unfortunately, the subsequent page merely repeats the results of the basic calculations, offering no guidance on where those figures should be placed. “Update the self-employment section of your 2023 to 2024 online tax return with your results” is the sole guidance provided.

Further investigation reveals a poorly labelled link to “preview your results,” which does display the answers against headings that correspond to the wording on the SA return but does not provide the box numbers.

Instead of relying on the new tool, Good recommends performing the simple calculation (estimated profits for AP ending in 2024/25 x number of days of that AP until 5 April 2024/366) and using this less flashy but considerably more practical HMRC helpsheet to ascertain precisely where the figures should be placed.

Completing the SA Return

The boxes pertaining to basis period reform are boxes 66 to 76 on the self-assessment (SA) return. The section refers to your “basis period” and requests 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 regarding 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 up to 31 March 2024? Utilizing the helpsheet and corroborating 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 Further Confusion

Upon completion using our test figures, the self-assessment calculation matched Taxpert’s. However, the taxation of the £7,491 transitional profits appears high at 55% (see screenshot below). Upon closer examination, Good notes that 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.”

The fact that basis period reform will pose challenges for sole traders, partners, and accountants is not news. The simplest option, where feasible, would be to align the AP with the tax year. In cases where this is not possible, a wealth of resources can be found on HMRC’s YouTube channel: Get help with basis period reform, on gov.uk, and in many useful articles on various considerations, such as this one on AccountingWEB. Time would be better spent reading and digesting these resources than navigating through the new interactive tool.

This article is based on a straightforward scenario with no alteration of the accounting date. The potential for misunderstanding and errors will significantly increase with more complex circumstances.

Additionally, HMRC released a new list of special cases for online filing which acknowledge that in various scenarios (especially where there is a transitional period loss), it may not be possible to file online, and agents and taxpayers are offered workarounds. This makes the navigation of the new basis period tool even more difficult.

If you are a sole trader and feel you may struggle with these changes, please contact us today.