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HMRC Basis Periods for Sole Traders

I’ve updated this post on 26 May 2020

HMRC basis periods ensure that self-employed sole traders are all taxed across the same time-frame. Reporting numbers that are different from the basis period may mean that a sole trader ends up being double-taxed.

What is a normal HMRC Basis Period?

As a sole trader, you’ll need to fill out your self-assessment tax return reporting your self-employment income and expenses for a set period of time.

Usually this must be 12 months, unless you are starting or stopping self-employment, in which case you may have less to report.

You can choose to report any 12 month period you like – this is known as your accounting period.

However, to keep the system fair to everyone who works for themselves, HMRC essentially ignores your accounting period and assesses everyone on the HMRC basis period.

A normal basis period for sole traders is defined by HMRC as 6 April to 5 April each year. In other words, it matches the tax year.

Example:

So if you were self-employed for the entire 2019/2020 tax year your basis period is 6 April 2019 to 5 April 2020.

HMRC considers the year 1 April to 31 March to be the same as the tax year, to help make sole trader reporting easier.

What Happens If a Sole Trader Chooses a Different Accounting Period to the Basis Period?

Self-employed sole traders can choose to report their income and expenses for any 12 month period they like.

But, regardless of choice, HMRC will override any accounting period and reset the figures to their basis period. This can have implications.

These implications are known as “Overlap Profits” and can result in a larger tax bill, in particular in your first year of trade.

It means most self-employed business owners choose an accounting period that matches the HMRC basis period to keep things simple, especially if they are responsible for completing their own tax return.

The 31 March is a popular choice because it is a natural end to a month, so makes record keeping and bookkeeping more straight forward.

Example 1

You go self-employed on the 1 June 2018. You choose an accounting period of 5 April each year.

Your basis period for HMRC purposes for the next three tax years, in other words, the figures you need to include on your tax return are for:

Tax YearAccounting Period
2018/20191 June 2018 to 5 April 2019
2019/20206 April 2019 to 5 April 2020
2020/20216 April 2020 to 5 April 2021

The first period you report on in your self-assessment tax return is shorter than subsequent years which will all be 12 months long.

Example 2

You go self-employed on the 1 June 2018. You choose an accounting period of 31 May each year.

Your basis period for HMRC purposes for the next three tax years are:

Tax YearAccounting Period
2018/20191 June 2018 to 5 April 2019
2019/20201 June 2018 to 31 May 2019
2020/20211 June 2019 to 31 May 2020

After the two years in business, your basis period is simply the 12-month period you use for your accounts.

But you’ll notice that you will have declared and paid tax on your profits from 1 June 2018 to 5 April 2019.

This has happened because you have chosen an accounting period that is different to the HMRC basis and is known as “Overlap Profits”.

Overlap Profits

Overlap profits mean a sole trader is taxed twice on the profits because a time period is assessed twice for tax.

They can seek relief for this double tax by changing accounting period or stopping self-employment.

Read more about Overlap Profits and How to Claim Relief

Wrapping Up

If you are a self-employed sole trader who is handling their own taxes, then choosing to report your income and expenses in line with the HMRC basis period will probably make filling out your return much easier.

You’ll also avoid paying tax twice and having to unravel the issue of overlap profits so you can claim back what you have overpaid.

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Anita Forrest
About Anita Forrest

Anita Forrest is a Chartered Accountant turned entrepreneur who helps the self-employed gain financial confidence when it comes to running the numbers side of their business and filing tax returns with guides, templates and resources on the Go Self-Employed website.