HMRC is consulting on changes which will affect the income tax payments of many sole traders and partners. The aim of these changes is to align the filing dates for the Making Tax Digital regime. If the changes take effect, some taxpayers will see higher tax bills in 2022/23.
Businesses draw up their accounts each year to a particular date, known as the accounting date. They often can choose their own accounting date, which is not necessarily the same as the date on which the tax year ends.
Currently, sole-traders and partners pay income tax based on the accounting period which ends in the tax year. For example, a business which produces accounts to the 30 April 2021 will pay tax for 2021/22 based on those accounts, also known as the current year basis.
In the early years of a business, special rules operate to ensure that profits are taxed in particular periods. This can cause the same profits to be assessed more than once. Relief for these ‘overlap profits’ is available when a business ceases or the accounting date is changed.
HMRC wants to change the current year basis to a tax year basis from 2023/24. Businesses will still be able to choose their own accounting date but income tax will be charged based on the tax year. The transition is planned to take place in the 2022/23 tax year.
Any unincorporated business which has an accounting date that does not end between 31 March and 5 April.
As an example, let’s look at a partnership with an accounting year end of 30th April. They have been in business for many years, making up accounts each year to 30th April and paying income tax accordingly.
In 2021/22, the tax return was prepared as normal, declaring the profits for the accounting year to 30 April 2021.
The following year 2022/23 is the transitional year. The partnership will have to move to the tax year basis. This means that profits for the accounting year to 30 April 2022 will be included on the tax return, plus profits for the period 1 May 2022 to 5 April 2023.
Profits for a period of 23 months will need to be declared with the income tax also payable on those profits by 31 January 2024.
HMRC has stated that transitional relief will be available, so the additional profits assessed in 2022/23 can be spread over 5 years.
Businesses with overlap profits from their opening years of trade can deduct them in 2022/23.
In practice, many will probably choose to change their accounting date to fit with the tax year. Those which don’t may find that filing deadlines could create problems.
For example, a business which makes up accounts to 31 December will need 2 sets of accounts to file their tax return by 31 January each year. This gives the business just one month to prepare the accounts or they would have to use estimated figures.
Now is a good time to start checking if any overlap relief is available and to plan ahead for possible higher tax bills for 2022/23.
If you would like assistance in how to navigate these changes or would like to discuss any potential tax related issues, please get in touch with our Tax Director Gail Swinburn (firstname.lastname@example.org) or your usual Lubbock Fine contact.