Experts are 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 6th 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. 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 30th 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 5th 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 5th 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.

Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. The FCA does not regulate tax advice. This article is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as of August 2021 and the contents of the Finance Bill. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.