HMRC are 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.
What is the current position?
Businesses draw up their accounts each year to the accounting date. They can choose their own date, which is not necessarily the same date as the tax year end date.
Currently, sole traders and partners pay income tax based on the accounting period which ends in the tax year. Special rules operate to ensure that profits are taxed in particular periods, which can cause the same profits to be assessed more than once. Relief for ‘overlap profits’ is available when a business ceases or the accounting date changes.
What is changing?
HMRC wants to change the current year basis to a tax year basis. An unincorporated business can still choose their own accounting date, but income tax will be charged based on the tax year.
How will it work?
As an example, let’s look at a partnership with an accounting year end of 30th April. They make up accounts each year to 30th April and pay income tax accordingly.
In 2022/23, the tax return was prepared as normal, declaring the profits for the accounting year to 30th April 2022.
2023/24 is expected to be the transitional year. The partnership will have to move to the tax year basis. This means that profits for the accounting year to 30th April 2023 will be included on the tax return, plus profits for the period 1st May 2023 to 5th April 2024.
Profits for 23 months will need to be deducted with the income tax also payable on those profits by 31st January 2025.
Transitional relief should be available, so the additional profits assessed in 2023/24 can be spread over 5 years.
What can businesses do?
Many will choose to change their accounting date to fit with the tax year, to avoid problems around filing deadlines.
A business which makes accounts to 31st December will need 2 sets of accounts to file their tax return by 31st January each year, giving one month to prepare the accounts without using estimated figures.
Now is a good time to start checking if any overlap relief is available and to plan for possible higher tax bills.
Next Steps
If you have any queries in relation to this article then please call us for an initial chat on 0330 236 9930, 0330 236 9938 and 07961 116321 or if you or have any questions about this topic then please email me at vee@navigatebr.com. This article is only intended to give you some idea of what is involved with, and the consequences of, a Directors Disqualification Undertaking. As with all things connected with insolvency the detail is very complicated and with the right help there is much that can be done to achieve the best possible outcome so long as the issues are addressed early.