ExEcutivE REPORt Tax change on the way


Earlier in July the government announced a consultation on proposals that would see a significant change in the way that sole traders and partnerships are taxed. Adam Bernstein reports…


W


hile in some ways it is a welcome simplification of often complex tax


rules, Kirsty Swinburn, a tax senior manager at BHP, considers that it could lead to an acceleration of tax liabilities for many businesses, with some facing higher than expected tax bills from January 2024.


As to whom it will affect, Swinburn says that the plans are for the new system to apply to all sole traders and partnerships and “will mainly affect those businesses who currently have anything other than a 31 March or 5 April accounting year end.”


The proposals Swinburn highlights that under the current regime, businesses are taxed based on the profits for the accounts year ending in the tax year – “so if your business has a 30 June year end, your 2020/21 tax will be based on the 30 June 2020 accounts.”


This, she says, creates complexities, particularly in “the opening years of a business when profits can be assessed twice, and ‘overlap’ profits created. This overlap is used when the business ceases, but the value is often eroded by time, or lost if a record isn’t kept.”


Under the government’s proposals, businesses will be taxed on profits earned in a given tax year, irrespective of their accounting year end, with an apportionment being applied if required.


Bringing the change in The question for many is when the change will occur. On this Swinburn says that as the proposals presently stand, the ‘tax year basis’ would replace the ‘current year basis’ entirely from 2023/24.


Says Swinburn: “2022/23 will be the transitional tax year and the transitional


adjustments involving the use of the historic overlap profits may, depending on profit levels, increase the tax liability for that year. Any additional tax would be payable 31 January 2024.” In mitigation, she says that there are proposals to allow a five-year spread of the additional tax for those businesses adversely affected, but this has not yet been finalised.


31 March or 5 April year end her advice it that they “should ensure they have a record of their overlap profits as relief for this will need to be claimed in the 2022/23 tax year at the latest. This figure should have been recorded on the tax return each year.” Again, professional advice may need to be sought if it hasn’t.


MARCH 31


As to what to do next, many businesses will no doubt want to consider changing their year-end to either 31 March or 5 April from 2023, “both of which are accepted as aligning with the tax year,” says Swinburn. But she cautions that “consideration should always be given to any industry specific factors.”


That said, Swinburn notes that for those businesses currently experiencing poor trading results, arising from the pandemic for example, early adoption of a 31 March on 5 April year end may be beneficial.


And for those sole traders and partners in businesses with anything other than a


28 Executive Hire News - September 2021


Of course, there is nothing written down in the proposals that requires businesses caught by the proposals to change their accounting year end but as Swinburn details, “businesses that don’t will need to do an apportionment each year. This means, for example, those with a 30 June accounting year end will have profits assessed in 2023/24 based on 3/12ths of the profit in the 30 June 2023, plus 9/12ths of the profit for the year ended 30 June 2024.”


She warns that “for those with a 31 December year end, would have just one month to prepare the accounts before the figures have to be submitted to HMRC.”


What comes next? The proposed reforms are all


part of the government’s Making Tax Digital (MTD) programme. MTD has been in place for VAT for a number of years now and MTD for Income Tax is scheduled to be introduced from 6 April 2023, so aligning with the start date for these is part of the proposed reforms.


In summary, Swinburn says that MTD for Income Tax will apply to all self-employed businesses and landlords with annual business or property income above £10,000. She says that “at its core is a requirement for quarterly reporting, a process which will be much simpler if all businesses are on a tax year basis for the assessment of profits.” n


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