What is an HMRC Basis Period

What is an HMRC Basis Period

Definition of the HMRC Basis Period

A basis period is a term used by HMRC referring to the time period on which someone who is self employed pays tax on their business profits. HMRC sets out rules on, depending on the stage a business is at, what the basis period should be. It’s really important to understand this often overlooked concept because it affects how much tax you pay and helps you to avoid being double taxed.

Basis Period v Accounting Period 

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

A basis period however is different to an accounting period usually being the same as the tax year (6 April to 5 April) and regardless of the accounting period you choose, HMRC will require you to report on their basis period ie: the tax year.

Note that there is a bit of flexibility from HMRC: Where the accounting date in the year is 31st March or 1st – 4th April inclusive, the basis period may treated as ending on 5th April for the purpose of working out your basis period. The 31 March is commonly used because it is a natural end to a month, so makes record keeping and bookkeeping more straight forward.

Examples of Basis Periods

Karan is a self employed candle maker and starts her business on the 1 June 2014 and decides to run her accounting period to the 31 May of each year. Her Basis Period for HMRC purposes for the next three tax years that need to be included in her tax returns are:

Tax Year Accounting Period
2014/2015 1 June 2014 to 5 April 2015
2015/2016 1 June 2014 to 31 May 2015
2016/2017 1 June 2015 to 31 May 2016

You’ll notice that Karan has paid tax twice on her profits from 1 June 2014 to 5 April 2015 in the first two tax years of her business.  Unfortunately this is a common side effect of choosing an accounting period that does not match HMRC basis periods and the rules of how you work out your tax.  This is known as Overlap Profits and luckily there is something you can do about to get Overlap Relief.

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