Basis Period Reform: Transition Profit & the Last Chance to Use Overlap Relief

Every sole trader and partnership that has ever used an accounting date other than 5 April went through a genuine, one-off structural change to how their profits are taxed. Some transitional profit is still working its way through five years of tax returns, and a narrower window to claim old overlap relief is closing.

What Basis Period Reform Changed

Before this reform, a sole trader or partnership with an accounting date other than 5 April was taxed, in most years, on the profits of the twelve-month accounting period ending within the relevant tax year, the current year basis. A business with a 30 April year end, for example, would in the 2022/23 tax year be taxed on the accounting period ending 30 April 2022, profits that were, by the time the tax return was due, already well over a year old. From the 2024/25 tax year onwards, this changes: all affected businesses are instead taxed on the profits actually arising within the tax year itself, apportioning a business's accounting period as necessary to align with 6 April to 5 April, the tax year basis.

The 2023/24 Transition Year

The 2023/24 tax year served as the transitional year that moved every affected business from the old basis to the new one in a single step. For a business with a non-tax-year accounting date, this meant the 2023/24 tax year covered more than the usual twelve months of profit, typically the normal twelve-month accounting period plus a further period bringing the business up to 5 April 2024, since the new tax year basis required profits to be brought fully up to date with the tax year end from 2024/25 onwards.

How Transition Profit Is Spread

Transition profit, after deducting any overlap relief available to set against it, is spread automatically over five tax years, starting with 2023/24 and ending with 2027/28, rather than being taxed entirely in the year it arose. A minimum of 20% of the transition profit, after overlap relief, must be brought into charge in 2023/24 itself, with the balance spread across the following four years in equal instalments by default. A business that would prefer to bring more of the transition profit into charge earlier, for example to use up available losses or reliefs in a particular year, can elect to accelerate more of the profit into earlier years than the default spreading would otherwise require, but cannot spread less than the statutory minimum into 2023/24.

The Overlap Relief Deadline

Overlap relief, unused relief carried forward from the early years of a business under the old rules where profits had, in effect, been taxed twice in the opening years, was always intended to be used up against the transition profit created by this reform. Businesses that held overlap relief and did not use it in the 2023/24 transition period risk losing it. HMRC has confirmed that 2025/26 is the final tax year in which any remaining unused overlap relief can still be claimed; overlap relief not used by the end of that window is lost permanently, regardless of how or when the original overlap profit arose or why it was not claimed earlier.

• Check historic records now for any unused overlap relief, particularly for businesses that changed accountants, changed accounting dates previously, or have simply never had cause to look at the figure before this reform made it relevant.
• HMRC's own records may hold the figure even where a business's own historic records are incomplete, since overlap relief figures are sometimes recorded on HMRC systems from earlier returns.
• Once the 2025/26 window closes, the relief is gone, with no further mechanism to revive it, making this a genuinely final deadline rather than a soft administrative cut-off.

The Ongoing Tax Year Basis

From 2024/25 onwards, every affected business is on the tax year basis permanently, which means businesses that retain a non-5 April accounting date now have to apportion or estimate figures each year to align their accounting period with the tax year, using provisional figures where final accounts are not yet available by the filing deadline and amending the return once actual figures are known. Many businesses have responded to this ongoing complexity by changing their accounting date to align with the tax year, removing the need for apportionment in future years, though this is not compulsory and some businesses have chosen to retain a different accounting date for commercial reasons and simply manage the apportionment each year instead.

Practical Points

• Confirm any unused overlap relief has been identified and used before the 2025/26 deadline; this is a one-off, closing window with no further opportunity to claim it afterwards.
• Review whether the default five-year spreading of transition profit, or an accelerated election, better suits the business's circumstances, particularly where losses, capital allowances, or other reliefs are available in specific years that could offset an accelerated charge.
• Decide whether to change the business's accounting date to align with the tax year, weighing the ongoing administrative simplicity of doing so against any commercial reasons for retaining the existing date.
• Where provisional figures are used for a return, ensure the return is subsequently amended once final figures are available, since HMRC can query returns left on provisional figures for longer than reasonably necessary.

Frequently Asked Questions