Changes ahead…

The Spring 2015 budget first announced “making tax easier” with the plan to reduce the administrative burden on taxpayers who currently complete an annual tax return.

The project had two elements:

• Creation and use of personal tax account for all taxpayers and
• New record -keeping and filing requirements for the self-employed

Following a recent consultation, the Chancellor is expected to reform basis periods. The objective is to simplify the taxation of trading profits with the aim of taxing profits in line with the tax year “tax year basis” rather than the accounting period. This would align the treatment of trading income with non-trading income i.e. property letting.  Initially this was proposed from 6 April 2023 but HMRC have now delayed it until 6 April 2024 at the earliest and as this is still in consultation it would not be unexpected if the start is delayed again.

The proposed change is being considered in conjunction with Making Tax Digital for Income Tax (MTD for ITSA) changes (which requires taxpayers to prepare and submit quarterly Tax Returns) to reduce the amount of MTD reports to be filed for tax payers whom have several sources of income for differing quarterly periods in the tax year.

For businesses who draw up accounts to 31 March or 5 April there will be no difference, which HMRC quotes as being 93% of sole traders and 67% of partnerships. However, for farming partnerships the harvest year is often chosen as the accounting year end as well.

HMRC is not asking businesses to change their accounting date, so a date to suit can still be used, however these profits will need to be apportioned to fit to the tax year.

Businesses with a 30 April year end will be particularly hit in the transition year (2023/24) as they will have to report profits for the period from 1 May 2022 to 5 April 2024. Although there will be transitional relief to spread the extra income falling in 2023/24 over 5 years to 2027/28, (individuals can elect to be taxed on the full amount in the transition year ) but that could still push people into higher rate bands for those years.

Example

A business makes up its accounts to 30 June annually.

On the current year basis, its basis period for the 2024/25 tax year would be:

• Profits of the year to 30 June 2024 (i.e. the accounting period ending within the tax year).

Under the tax year basis, the business will report for the 12 months to 31 March 2025, so the apportionment would be:

• 3/12 of its profits/losses for the period of account to 30 June 2024, PLUS
• 9/12 of its profits/losses for the period of account to 30 June 2025.

Note that if the accounts to 30 June 2025 are not finalised, then this 9 months’ profits/loss will have to be estimated for submission of the 2024/25 tax return, and the tax return subsequently amended once the accounts are finalised.

Whilst the rules may simplify certain areas, businesses that do not have a 31 March (5 April) accounting year end will need to consider these changes on their cashflow especially during the transition year which could see significantly increased amounts of profits being taxed.  Having the tax year basis for trading income would bring the payment of tax closer to the time that profits are earned, making it easier for businesses to save for their tax liabilities and improve compliance.