Leading Cumbrian accountancy firm Armstrong Watson is warning that small businesses could see significant changes to the way they are taxed following the launch of a consultation by the Government, which may result in some facing higher tax bills than expected.
The proposed Basis Period Reform, HMRC claims, will simplify rules under which accounting profits of sole traders and partnerships are allocated to tax years using basis periods, aiming to simplify the system before Making Tax Digital is fully implemented for these small businesses.
The six-week consultation comes to an end on August 31.
If implemented, the new rules will be fully introduced from April 2023, with the tax year starting April 6 2022 as a transitional year.
Accountancy bodies are already lobbying the Government for a delay to allow businesses and accountants to get to grips with these changes.
Sole traders and partnerships are currently taxed on their accounts ending in the tax year, and a business can choose any date to prepare accounts to. Some businesses have kept the same accounting date they have had for many years, while others have an accounting date that makes stock counts and other year-end procedures easier. HMRC’s preference is for everybody to prepare accounts to March 31 or April 5 each year.
Armstrong Watson’s head of accounting, Richard Andrew, said: “The reform would mean businesses would be taxed on profits arising in a tax year and is intended to align the way self-employed profits are taxed with other forms of income, such as rents received or investment income.
“For example, under the current rules a business with a year end of June 30 2021 would be taxed on these profits in the tax year to April 5 2022, but under the proposed changes, 9/12ths of the profits would be taxed in the previous tax year to April 5 2021.
“For a business that retains its traditional accounting date, the taxable profit to enter on the tax return will be made up of apportionments from two sets of accounts, making it difficult to see how this can be described as a simplification.”
For a business that decides to move its accounting date to March 31 or April 5, there is a transitional adjustment in the tax year ending April 5 2023.
Businesses that have had their current accounting date for a long time, or who have significantly increased their profits since commencement, could face an unexpected tax bill, although there is likely to be the facility to spread this additional tax charge over five years, which will be helpful.
HMRC said the new system aimed to reduce the time spent by small businesses filing their tax returns, and make the rules fairer, more logical and easier to understand.
Richard added: “Whilst these changes may simplify matters for small businesses not using an accountant, they are likely to increase complexity and accelerate tax bills for some businesses.
“The consultation period is short and the proposed start date for transition in April 2022 suggests that HMRC will be pushing ahead with this in order to ensure that quarterly reporting under MTD in April 2023 can be introduced on time as planned.”
