The 2023/24 tax year has been one of transition. Previously, sole traders and partners/members in a business paid tax for a tax year based on the business’s financial performance in a 12-month accounting period ending in that tax year. However, in 2024/25, the rules will change. Under the new regulations, unincorporated businesses will be taxed on profits generated during the actual tax year, regardless of the year end to which the business prepares its account.
As a result of these reforms, last year, thousands of UK businesses prepared their business accounts for a date ending between 31st March and 5th April. In an attempt to ease the administrative and financial burden that this change might inflict, HMRC has released a new Overlap Relief Form that will reduce a transitioning business’s taxable profits.
You Can Now Request Overlap Relief Information Online
Business owners and self-employed taxpayers who previously had an accounting year end of 5th April may have some overlap relief available. HMRC’s new Overlap Relief Form makes it easy to provide anyone with information about their overlap tax relief based on their previous tax returns. It is recommended that taxpayers act sooner rather than later to receive assistance before the 2023/24 self-assessment tax return deadline (usually 31st October 2024 for paper tax returns and 31st January 2025 for returns filed online).
What Are Overlap Profits?
Under the previous rules used to determine which profits of an unincorporated business are taxed in a particular tax year, some profits may be taxed twice due to an overlap between the business’s tax year end and the end of the actual tax year. This usually occurs in a business’s first couple of operating years. Profits that are taxed twice are known as overlap profits.
What Is The Overlap Relief Form?
It has always been the case that overlap relief should be brought forward each year on the self-assessment tax return, either in the final year of trading or if the accounting date has changed. However, due to the basis period reforms, overlap relief will now be used to reduce additional taxable profits in 2023/24 brought about by the new rules.
This basis period reform means that taxpayers will be required to report their taxable profits to HMRC in line with the tax year end rather than the end of their account year end from 2023/24. Where a business’s accounting year falls outside the period from 31st March to 5th April, additional profits will be taxed between the end of the accounting period and 5th April 2024. HMRC appreciates the administrative hassle this will cause thousands of UK businesses and has released the Overlap Relief Form to make the transition as easy as possible.
How Will I Receive Overlap Relief?
You’ll need to calculate your overlap profits to claim your overlap relief. This number may be challenging to find, particularly for a business operating for many years. Therefore, HMRC has launched an online form to submit requests for details about overlap relief. HMRC can only provide historical information on overlap profits if it was reported on past tax returns. If that data is not available in the system, do not worry. HMRC should be able to provide enough data for our team at Digital Tax Matters to calculate the overlap relief available. It usually takes around three weeks for HMRC to respond to requests for details of overlap relief, but complex cases can take longer, so it is important to get the ball rolling and apply for any missing information now.
Once you have this number to hand, overlap relief must be claimed in your 2023/24 tax return, which must be filed by 31st January 2025. Any overlap relief on the 2024 tax return will be automatically deducted from the additional profits. The remaining ‘transitional part’ will be spread over the five tax years from 2023-24 to 2027-28.
Business owners and sole traders can accelerate the taxation of the transitional part if they prefer. There are many circumstances where this might be beneficial. To further understand if this is the right decision for you, our team of expert accountants can help you decide how to allocate your additional profits best.
Taking The Next Steps
Despite the additional administrative work, thousands of sole traders and partners in the business stand to benefit financially from HMRC’s Overlap Relief Form. If your taxable profits have been deducted twice, move to reclaim your losses before the tax deadline at the start of 2025. For advice on how to best manage your tax returns in this transition year, get in touch with our friendly team of accountancy specialists at Digital Tax Matters.