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Accounting standards  •  Business Services  •  Business Tax  •  Tax Planning

Proposals for unincorporated businesses could mean extra tax in the short-term

By RJP LLP on 28 September 2021

Some significant changes may be coming into operation that will have an impact on unincorporated business owners who are required to complete self-assessment tax returns. This is related to the introduction of MTD (Making Tax Digital) in April 2024 with proposals that mean businesses will need to start declaring profits based on the tax year, which ends on 5 April, rather than on their chosen accounting year. Currently these changes are at the consultation stage, but it is worth being aware of the proposals and understanding what impact they could have on your business. This article explains what is proposed and the implications.

Currently, unincorporated businesses (sole traders and partnerships) are assessed to income tax in each tax year based on their profits arising in the accounting year that ends within that tax year – the current year basis of assessment.

This basis of assessment has been in operation since 1996 and provides a high degree of flexibility because accounts can be drawn up to any date within the tax year. The way these rules are applied means that some profits are taxed twice when a business commences and these duplicated profits attract overlap tax relief when the business ceases or, to an extent, if the accounting year changes.

The current proposal is that all profits will be assessed to tax based on the tax year end of 5 April with a quarterly payment schedule being introduced for MTD. Although MTD has been delayed so far, it is intended that it will be introduced on 6 April 2024; a year later than originally scheduled.

It is intended that under MTD, reports and tax payments will be made to HMRC each quarter using accounting software. It will therefore simplify matters for HMRC and businesses alike, if the current year basis with all its different year-ends, is replaced with a tax year basis of assessment, with all unincorporated businesses preparing their accounts to the tax year end on 5 April. The result will be the submission of a quarterly return and tax payments payable electronically on the same date for every business.

Although the proposals to abolish current basis periods will simplify things in the long term, the question poses itself as to how the different transitional periods will be dealt with for each business. Depending on the current accounting year-end of a business, it may mean there will be extra tax to pay in the first year on up to almost two years of profits.  For example, a business that currently prepares its accounts to 30 April will have its tax liability for the 2023/24 tax year based on profits of the year to 30 April 2023 (as currently), plus profits for the period from 1 May 2023 to 5 April 2024, to bring it into line with the tax year.

There are ways to manage the extra costs of this change; if available, overlap relief from when the business commenced could be used to reduce the profits taxed in the year; in addition, the government proposes to offer transitional relief to spread the excess profits that would be taxed in the transitional year over five years. If the business then ceases to trade in that five year period, the amount remaining will become chargeable.

If you have any questions about this change and how it could impact your unincorporated business, please get in touch. We will be able to advise you on how this could affect your cashflow and whether you could be entitled to tax relief.

Contact us by emailing partners@rjp.co.uk for further information and support.

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