HMRC loves to give us rules to follow and none is more important than the Basis Period.

When you are self-employed, it determines exactly which income and expenses you need to declare on your tax return.

What is the Definition of the HMRC Basis Period

A basis period is a term used by HMRC that helps you to work out which income and expenses you need to include in the self-employment section of your tax return.

The official basis period as defined by HMRC is 6 April to 5 April each year (the same as the tax year).

So if you were self-employed for the entire 2018/2019 tax year your basis period is 6 April 2018 to 5 April 2019.

HMRC Basis Period or Accounting Period 

Accounting periods are often confused with the basis period. But there is a difference.

The main difference between the basis period and accounting period is that accounting periods are something you can choose, whereas the basis period is something set by HMRC.

An accounting period is the period of time covered by your accounts.  You can choose any period of time you like and, unless you are starting or ceasing trading, it would normally be 12 months.

People tend to choose like choosing specific accounting periods for different reasons:

  • It makes reporting easier;
  • It’s logical for example choosing December is the end of the year.

When you are self-employed, HMRC will require you to report your figures on your tax return using their basis period.

What this means is when you are self-employed choosing a different accounting period to the basis period can have tax 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.

It is worth noting that HMRC allows you to treat accounting periods that end 31 March as the same as their basis period.

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.

HMRC Basis Period Example 1

You go self-employed and start your business 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 all cover 12 months).

HMRC Basis Period Example 2

You go self-employed and start your business 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”.

Read More About Overlap Profits

Updated: 27 May 2019

Anita

Anita is a Chartered Accountant with over a decade of experience taking self employed business owners from financially confused to business savvy.
She is the creator of the ‘Go Self Employed’ website, which her corner on the internet where she makes self employment less terrifying.
Anita