The way in which the tax basis period is calculated for the self-employed and partnerships is set to be reformed ahead of the implementation of Making Tax Digital in April 2024.
How Does it Work Presently?
At present unincorporated businesses are free to choose their accounting year-end. These profits are then taxed according to the tax year in which the accounting year-end falls. A business with a year-end of 30 September 2021 would be taxed on those profits in the tax year running from 6 April 2021 to 5 April 2022 (2021/22), with the tax payable on 31 January 2023.
What are the Changes?
His Majesties Revenue & Customs (HMRC) will tax all unincorporated businesses and LLPs on a tax year basis regardless of the accounting year-end. There is no requirement to change the accounting year end of the business, just the way profits are taxed. This is confusing, so I suggest businesses change their year ends to 31 March or 5 April.
Will there be a Transitional Period?
HMRC knows that during the 2023/24 tax year when the new rules are implemented, an increased amount of tax may be payable as more than 12 months of profits can be brought into account. You can offset any overlap profits but, in many cases, these may be considerably lower than current year profits (as they were created when the trade was commencing).
Where taxable profits exceed the current year’s profits, excess profits can be spread over five years. It is possible to accelerate the taxation of the spread profits (pay over less than five years), however, they cannot be deferred (pay over more than five years).
Making Tax Digital for Income Tax
These changes are a forerunner to Making Tax Digital (MTD) for income tax which is due to be introduced from 1 April 2024 for sole traders and landlords and 1 April 2025 for partnerships. MTD sees all sole traders, partnerships, and landlords with turnover greater than £10,000 required to keep records digitally and submit quarterly updates to HMRC.
Currently, sole traders, partnerships and landlords submit one tax form each accounting period. Under MTD they will need to submit five tax forms each accounting period (four quarterly returns and a ‘sweep up’ return at the end of the accounting period.
Although the frequency of reporting is to change, the timing of tax payments will not and the current system of payments on account and balancing payment by 31 January after the tax year is expected to remain in place for the foreseeable future.