Changes to Tax Year Basis for Self-Employed
There will be a change for self-employed individuals and partners from the current year basis to the tax year basis from the 6th April 2024.
Why are they making changes?
In the House of Lords Finance Bill sub-committee meeting on the 28th October, an HMRC spokesperson declared the change was essential for the implementation of Making Tax Digital. Without it, the quarterly reporting under Making Tax Digital for Income Tax Self Assessment would not provide meaningful estimations of the taxes that are due for your business that year.
How will it work?
The change to the tax year basis means that all unincorporated businesses will be taxed on the profits from that tax year rather than the profits made in the account period that ends in that tax year, which is the ‘current year’ basis.
Who will it affect?
The change will affect all unincorporated businesses that do not currently draw up their accounts for the 31st March, 5th April or any date in between. They will find that their taxable income is accelerated.
When will it begin?
The change was originally meant to take place in 2023–34, but as Making Tax Digital for Income Tax Self Assessment has been delayed for a year, so will the abolition of the current year basis.
The tax year basis will take place in 2024/15.
Will there be a transition period?
The transitional year was originally meant to take place in 2022/23, but to align with the delays it will now be 2023/24.
This means some businesses could encounter double taxation as they will be taxed on more than 12 months’ worth of profits. For example, if you draw up your accounts to the 30th September, in 2023/24 you will be taxed on the year to the 30th September 2023, as well as the period from the 1st October 2023 to the 5th April 2024.
Will it affect allowances?
Many people have pointed out how the bunching of profits from the transitional year and over the next 5 years could have an effect on taxpayers’ entitlement to personal allowance, pension annual allowance, the HICBC and student loan repayments.
The government will address these consequences through changes to the draft legislation.
Will there be any other problems?
If you don’t change your accounting period to align with the tax year end, you will have to apportion profits from two accounting periods to complete your finalisation statement, which is replacing the tax return. This would involve estimating profits from one of the periods. HMRC has estimated that 278,000 businesses will have to use provisional or estimated figures on an ongoing basis.
How much revenue will this raise?
The switch to a tax-year basis is estimated to raise £1.75 billion in extra tax from 2022 to 2027. Further unquantified amounts of accelerated tax will be paid over the following two years.
It is estimated that the total impact could be over £2 billion in extra tax.
How will this affect my business?
These changes are likely to bring considerable administrative costs to affected businesses. This includes familiarising yourself and staff with the new basis period rules, updating business software, and deciding whether you should change your accounting date to the 31st March or 5th April.
HMRC estimated these costs are likely to be £9.1 million in total for ALL affected businesses, but the Chartered Institute of Taxation (CIOT) has said they think this figure is unrealistic.
HMRC also estimated that the change to the tax year basis will save £10.2 million overall; however, these savings might not be experienced by businesses that are burdened with additional administrative costs.
Pete Miller, chair of the CIOT’s Owner Managed Business Committee, commented: “Given the additional ongoing compliance and administrative burdens that we believe affected businesses will suffer to comply with the new rules, we find it hard to believe that these are outweighed by savings elsewhere.”
You can read more about the change to the basis period here.
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