We all know that tax is taxing and that the rules are constantly changing. Well now we have a proposed change to one of the rules on the time periods that apply to businesses for reporting on their tax returns. Sound boring? Well yes – after all this is tax we are talking about! But what does it mean? That in one year, some people will pay double their normal tax bill!
Interestingly, the HMRC press release on this is all about making it easier for small businesses to fill out their tax returns. However, if you are working as a self-employed person or in a partnership, then this might mean that up to two years’ worth of profits are taxed on one tax return!
Right now this change is a proposal by HMRC – but they have drafted the legislation! Which means it is pretty much a done deal, and the only changes are likely to be minor ones. The changes are planned to come into force by 2023, and will mean that businesses will be taxed on profits arising in a tax year, rather than profits of the accounts year ending in the tax year.
Who will it affect?
The rule change affects:
· self-employed, partnerships, trusts, and estates with trading income – any business that is taxed under income tax rules. (So this doesn’t affect limited companies, but does affect sole traders and LLPs,)
· businesses who don’t have a 31st March or 5th April year end for their business.
What is it?
The change affects the ‘tax year basis’ and means that a business’s profit or loss for a tax year is the profit or loss arising in the tax year itself, regardless of its accounting date.
Example
David LLP has a 30th April business year end. The accounts for 30th April 2022 will be taxed in their 2023 tax return … but so will the profits for the period from 1st May 2022 to 31st March 2023. Meaning that 23 months worth of profits are taxed on their 2023 tax return …leading to a higher than usual tax bill.
For 2024, the next tax year, they will be taxed on the profits in the period 1st April 2023 to 31st March 2024 …and so on in the future.
Can I mitigate against a double tax bill?
You can’t avoid paying taxes on your profits – but what you can do is to change your businesses year end in a couple of steps in the years between now and 2023. The effect of this will be to spread your tax bill out over more years, and potentially will save you tax. However it may be better to use HMRC’s own profit spreading rules.
HMRC are potentially going to include some tax saving in their rules! The consultation suggests that for businesses with higher profits in 2022 to 2023, due to the change in basis they will give the option to spread the additional profits over a period of up to five years. No details are yet available so we need to wait and see.
Some businesses will have ‘overlap relief’ – which is a tax relief you might have built up when you started your business. Check with your accountant for details.
What next?
HMRC very proudly said that only 7% of sole traders and 33% of partnerships will be affected by this – scant comfort to you if you are caught of course!
The main issue is that we have the proposal from HMRC, but not the actual rules. What will change between the proposal and the final thing? One thing is for sure, you need to know if you will be caught, and if so, to think about what it means for you.
If you think you are caught by the rules, then now is the time to ask your accountant for help. What is it likely to mean for you? Should you look at changing your year-end in stages? Should you look at transitioning to a limited company?
If you would like our help in looking at this then please get in touch to book a tax saving consultation.
