Abolition of basis periods - an opportunity for loss relief

Basis periods

The abolition of basis periods for unincorporated business will take effect in April 2024. This could well mean bad news for affected businesses, but the special pandemic-related loss relief rules which extended the period against which relief could be claimed could be used as a catalyst to improve the advantages situation. Extended loss relief only applies for losses made in accounting periods that ended on or before 5 April 2022.

Even though the extended loss relief period has passed, businesses can access it by changing their accounting period so that it ends on or before the cut-off date.

Why change the accounting date?

The abolition of basis periods is mandatory and will almost have the same effect as changing the accounting date to coincide with the tax year end. While most sole traders will let this take place according to HMRC’s timetable, those who have made losses might do better to pre-empt it and change their accounting date to 5 April sooner.

Changing the accounting period for the 2021/22 tax year means the business can claim the extended loss relief for losses which would otherwise not qualify. What’s more, it can increase the loss by any overlap relief that it's entitled to.

Example. Jacky’s business suffered badly because of the restrictions placed on it during the pandemic. The table below shows her profits and losses and the years they are taxable, assuming she keeps her current accounting year end of 30 April.

Year ended 30 April 2020	Profit £50,000	2020/21
Year ended 30 April 2021	Loss £15,000	2021/22
Year ended 30 April 2022	Profit £5,000	2022/23
Year ended 30 April 2023 (estimated)	Profit £30,000	2023/24
Overlap relief to be used in 2023/24	£20,000	2023/24

 

However, if Jacky changes her accounting date to 5 April the position looks like this:

Year ended 30 April 2020	Profit £50,000	2020/21
Year ended 30 April 2021	Loss £15,000	2021/22
Period ended 5 April 2022	Profit £4,500	2021/22
Overlap relief used in 2021/22	£20,000	2021/22
Year ended 5 April 2023	Profit £30,000	2023/24

 

The change means that Jacky’s profit and loss for the periods ended 30 April 2021 and 5 April 2022 are aggregated. It also unlocks the overlap relief of £20,000 which increases the overall loss to £30,500. Comparing Jacky’s position before and after the change of accounting date it’s apparent that the loss for 2021/22, for which she can claim the extended loss relief, is greater by £15,000 (£15,000 loss - £4,500 profit + £20,000 overlap relief). Jacky can use it to reduce the profits taxable for 2020/21 from £50,000 to £19,500. In this example, Jacky doesn’t need to use the extended period for loss relief, but had her profits for 2020/21 been less than the loss (£30,500) she could have done so and claimed relief for the excess loss against her 2019/20 profits.