A simplified tax reporting system may be coming into play after HMRC announces proposed radical changes to the way businesses are taxed
Under the current system, tax returns filed by the self-employed, sole traders and partnerships are based on a business’s set of accounts ending in the tax year (5 April).
This can mean that the period of their accounts is different to the tax year. The proposed reform will mean businesses pay tax on profits in the tax year they actually occur.
The HMRC states:
Businesses will be taxed on profits arising in a tax year, rather than profits of accounts ending in the tax year. It should help them spend less time filing their taxes – aligning the way self-employed profits are taxed with other forms of income, such as property and investment income.
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But this simplified tax reporting may not be as straightforward as it seems if your year-end is not 31 March or 5th April.
Example:
A business draws up accounts to 30 June every year.
Currently, income tax for 23/24 would be based on the profits in the business’s accounts for the year ended 30 June 2023.
The proposed reform would mean the income tax for 23/24 would be based on: 3/12 of the income for the year-end 30 June 2023, plus 9/12 of the income for the year-end June 2024 covering the period to 5 April 2024.
The change announced on 20th July 2021 is proposed to come into force by 2023 as part of the government’s plans to provide self-employed business owners with a more modern, digital, integrated service. This will be implemented through the forthcoming Making Tax Digital (MTD) for Income Tax due to be introduced from April 2023.
Businesses will be affected in different ways. If profits are climbing it will mean tax will be calculated earlier under this system and whilst there are plans to help spread that burden the final details are not yet clear. Some seasonal businesses may also be adversely affected.
It may prove beneficial to consider a change of year-end in advance of these changes and we recommended you discuss this with your accountant sooner rather than later.