BIM81290 | Transitional rules: transition part of the basis period exists

From HM Revenue & Customs · Business Income Manual

Where the basis period has both a standard part and a transition part, the profits for the 2023-24 basis period must be calculated in accordance with the steps outlined below.

In these circumstances, profits of more than 12 months will be taxed in the 2023-24 tax year. To mitigate this, the computation reduces the profits of the transition part (the transition profits) by the amount of any overlap relief available. It then allows for any remaining transition profits to be spread across five tax years.

Step	Description
Step 1	Calculate the profit/loss of the standard part of the basis period.
Step 2	Calculate the profit/loss of the transition part of the basis period.
Step 3	Deduct the overlap profit from the amount in step 2.
Step 4	Add the amounts given by steps 1 and 3.
	If the amount that was given by step 3 and/or step 4 is nil or a loss, this is the total profit/loss for the basis period.
	See BIM81300 for the treatment of a loss (or increased loss) arising from this step.
	Otherwise, continue to step 5.
Step 5	Calculate the amount of the total transition profit.
	This is the lesser of:
	1) the amount given by step 3;
	2) the amount given by step 4;
	Then calculate the amount of the transition profit that will be treated as arising in the tax year.
	This will usually be 20% of the total transition profits unless an election is made.
	Transition profits will usually be spread, and taxed, equally across five tax years. Profits not taxed in 2023-24 will be taxed in subsequent tax years. See BIM81310 for the rules on spreading.
Step 6	Calculate the taxable profit for the basis period. This is:
	a) the amount given by step 5 if the amount given by step 1 is nil or a loss, or
	b) the sum of the amounts given by step 1 and step 5, if the amount given by step 1 is a profit

Example 12 – standard part profit, transition part profit

A trader prepares accounts to 30 September annually. The accounts to 30 September 2023 show a profit of £8,000 and the accounts to 30 September 2024 show a profit of £10,000. They have no overlap profits.

The profit for the 2023-24 transition year is calculated as follows:

Step	Description
Step 1	The profit of the standard part of the basis period:
	1 October 2022 to 30 September 2023: £8,000
Step 2	The profit of the transition part of the basis period: 1 October 2023 to 5 April 2024: £10,000 x 188/366 = £5,137.
	The profits from the 30 September 2024 accounts are apportioned.
Step 3	Deduct from the amount in step 2 any overlap profit allowed:
	£5,137 - £0 = £5,137.
	There are no overlap profits to deduct.
Step 4	Calculate the sums of the amounts given by steps 1 and 3:
	£8,000 + £5,137 = £13,137
Step 5	Calculate the amount of the total transition profit (this is the lesser of the amounts given by steps 3 and 4).
	In this case it is the amount given by step 3:
	£5,137.
	Next, calculate the amount of the transition profit that will be treated as arising in the tax year.
	Assuming no election is made to bring into charge a greater amount of transition profits:
	£5,137 x 20% = £1,027
Step 6	Calculate the taxable profit for the basis period.
	As there is a profit in the standard part (step 1), the taxable profit is the sum of steps 1 and 5:
	£8,000 + £1,027 = £9,027

Example 13 – standard part profit, transition part profit

A trader prepares accounts to 30 September annually. The accounts to 30 September 2023 show a profit of £12,000 and the accounts to 30 September 2024 show a profit of £6,000. They have overlap profits of £1,000.

The profit for the 2023-24 transition year is calculated as follows:

Step	Description
Step 1	The profit of the standard part of the basis period:
	1 October 2022 to 30 September 2023: £12,000
Step 2	The profit of the transition part of the basis period:
	1 October 2023 to 5 April 2024: £6,000 x 188/366 = £3,082.
	The profits from the 30 September 2024 accounts are apportioned.
Step 3	Deduct from the amount in step 2 any overlap profit allowed:
	£3,082 – £1,000 = £2,082
Step 4	Calculate the sums of the amounts given by steps 1 and 3:
	£12,000 + £2,082 = £14,082
Step 5	Calculate the amount of the total transition profit (this is the lesser of the amounts given by steps 3 and 4).
	In this case it is the amount given by step 3:
	£2,082.
	Next, calculate the amount of the transition profit that will be treated as arising in the tax year.
	Assuming no election is made to bring into charge a greater amount of transition profits:
	£2,082 x 20% = £416
Step 6	Calculate the taxable profit for the basis period.
	As there is a profit in the standard part (step 1), the taxable profit is the sum of steps 1 and 5:
	£12,000 + £416= £12,416

Example 14 – standard part profit, transition part loss

A trader prepares accounts to 31 December annually. The accounts to 31 December 2023 show a profit of £35,000. The accounts to 31 December 2024 show a loss of £15,000. There are overlap profits of £2,500.

The profit for the 2023-24 transition year is calculated as follows:

Step	Description
Step 1	The profits of the standard part of the basis period:
	1 January 2023 to 31 December 2023: £35,000
Step 2	The loss of the transition part of the basis period:
	1 January to 5 April 2024: (£15,000) x 96/366 = (£3,934)
Step 3	Deduct from the amount in step 2 any overlap profit allowed:
	(£3,934) - £2,500 = (£6,434)
Step 4	Calculate the sum of the amounts given by steps 1 and 3:
	£35,000 + (£6,434) = £28,566.
	As the amount given by step 3 is a loss, the taxable profit for the basis period is £28,566, the amount given by this step.

Example 15 – standard part loss, transition part profit

A trader prepares 12-month accounts to 30 June 2023 showing a loss of £10,000. Following a change of accounting date, their next set of accounts cover the 9 months from 1 July 2023 to 31 March 2024 and show a profit of £35,000. They have overlap profits of £5,000.

The profit for the 2023-24 transition year is calculated as follows:

Step	Description
Step 1	The loss of the standard part of the basis period:
	1 July 2022 to 30 June 2023: (£10,000)
Step 2	The profit of the transition part of the basis period:
	1 July 2023 to 31 March 2024: £35,000
Step 3	Deduct from the amount in step 2 any overlap profit allowed:
	£35,000 - £5,000 = £30,000
Step 4	Calculate the sums of the amounts given by steps 1 and 3:
	(£10,000) + £30,000 = £20,000
Step 5	Calculate the amount of the total transition profit (this is the lesser of the amounts given by steps 3 and 4).
	In this case it is the amount given by step 4:
	£20,000.
	Next, calculate the amount of the transition profit that will be treated as arising in the tax year.
	Assuming no election is made to bring into charge a greater amount of transition profits:
	£20,000 x 20% = £4,000
Step 6	Calculate the taxable profit for the basis period.
	As there is a loss in standard part (step 1), the taxable profit for the basis period is the amount given by step 5:
	£4,000

Example 16 – standard part loss, transition part loss

A trader draws up accounts to 30 April annually. The accounts to 30 April 2023 show a loss of £12,000 and the accounts to 30 April 2024 show a loss of £6,000. They have overlap profits of £4,000.

The profit for the 2023-24 transition year is calculated as follows:

Step	Description
Step 1	The loss of the standard part of the basis period:
	1 May 2022 to 30 April 2023: (£12,000)
Step 2	The loss of the transition part of the basis period:
	1 May 2023 to 5 April 2024: (£6,000) x 341/366 = (£5,590).
	The losses from the 30 April 2024 accounts are apportioned.
Step 3	Deduct from the amount in step 2 any overlap profit allowed:
	(£5,590) – £4,000 = (£9,590)
Step 4	Calculate the sums of the amounts given by steps 1 and 3:
	(£12,000) + (£9,590) = (£21,590).
	As both the amounts given by steps 3 and 4 are a loss, the loss for the basis period is (£21,590), the amount given by this step.
	There will be no impact on the taxable profits of future years. However, see BIM81300 for the treatment of a loss (or increased loss) arising from this step.