September 20, 2021
Article
Since the 1990s, business owners have paid tax based on their accounts which end in a particular tax year, so if you draw your accounts to 30 September, your profits for 30 September 2020 will be taxed in the tax year 2020/21. The rules can be slightly more complicated in a business’ first few years or as it ceases, but the rules have been in place now for many years and are familiar to many. Only one tax return a year is needed for businesses, which also deals with the owners’ personal tax, although separate returns are needed where the business is VAT registered (quarterly VAT returns) or where a taxpayer sells a residential property in the year (30 day CGT return).
However, HMRC’s Digital Roadmap has long set out HMRC’s desire that all taxpayers, including businesses, should report all income sources on a quarterly basis, whether VAT registered or not, placing a significant burden on those less familiar with digital filing, and increasing the number of filings required each year. Increased filings will inevitably mean increased costs. HMRC’s stated objective for this is to enable taxpayers to have greater visibility over their tax affairs and to be provided with regular tax estimates by HMRC so that they can better plan their cash flows.
Business owners above the VAT threshold are already required to file their information digitally under the Making Tax Digital (MTD) rules for VAT. HMRC are extending this to all business and property owners with income of more than £10K per annum from April 2023 under MTD for Income Tax. However, just when businesses, property owners and accountants were coming to terms with this deadline, HMRC launched a grenade under their Basis Period Reform consultation issued on 20 July 2021, proposing that all unincorporated businesses should now be assessed based on the profits in each tax year, regardless of their accounting date, in a possible drive to force more businesses to change their year end to 31 March.
The changes would mean that if a business had a September year end, then in 2024/25, you will be taxed on a prorated 6 months of your profits to 30 September 2024 and a prorated 6 months of your profits to 30 September 2025, requiring your return to be estimated first, and then revised once your second set of accounts are completed. This is being cited as a simplification. The alternative will be to change your accounts date to 31 March, but this will not be practical for all businesses and will not be serviceable by accountants.
It is currently prosed that 2023/24 will be the transitional period, with up to 23 months of profits being taxed for some businesses (30 April year ends), less any overlap relief from earlier years; such relief is likely to be low for mature businesses.
Where this still gives a higher figure than would normally be taxed, taxpayers will have the option of spreading the surplus profits over a 5 year period, or having this taxed sooner. However, more profits will be being taxed each year in either event and this is going to be at marginal rates, which will likely impact on tax rates, loss of personal allowances, pension allowances, child benefit and child care payment claw backs and national insurance costs, to name but a few.
In our view, the proposals are being rushed through. The timings will not allow businesses to properly plan for this and nor will there be adequate time for all implications to be properly considered and legislated for, or communicated to taxpayers. Further, the consultation period is exceptionally short and all responses had to be made by 31 August 2021, which in our view may impact on our tax system’s integrity.
If you would like more information on this, please contact us.