Taxation of self-employed individuals and partners – HMRC consultation

Date posted: 13th Aug 2021

HMRC have announced a consultation that could impact upon the amount of tax payable by self employed individuals, including partners of a traditional partnership or a LLP.

This is partly due to tax simplification and partly to prepare for Making Tax Digital reporting which essentially means businesses will have to report their income/expenses on a quarterly basis to HMRC via an electronic submission. Given that the UK tax year is almost at a calendar quarter end (5 April is approximately 31 March), HMRC are proposing that all unincorporated businesses report profits for a year end in line with the tax year.

HMRC also believe that businesses make mistakes with tax reporting and wish to reduce the perceived “tax gap” by forcing businesses to keep electronic records of business transactions and report electronically.

 

Current position

Currently, a business has a choice in relation to the year end it draws accounts up to.

Some businesses chose to draw accounts up to 31 December each year, so that they can compare calendar year profits. Another business, perhaps a seasonal trade, may chose a different year end – a travel/holiday company may have a September year end so that they can compare holiday seasons on a year on year basis. Sometimes a year end is simply on the anniversary of the date that the business began. However, other businesses may chose to align their year end with the tax year end – 31 March or 5 April. The choice of year end is completely up to the owner(s) of the business.

The taxation of profits in the early year of a business with a non-tax year end accounting period, can be quite complicated (hence the proposal to simplify) but as the business continues, the owner(s) are taxed on the profits of the business, that all into a particular tax year. For instance, the owners of a continuing business with a year end of 30 June 2022, will be taxed on those profits in the 2022/23 tax year, as the 30 June 2022 falls between 6 April 2022 and 5 April 2023.

 

Proposals

However, the HMRC consultation proposes that all businesses will have a year-end date of 31 March / 5 April to help simplify matters, which means that the 2022/23 tax year could be one in which further profits are reported. One particular problem with this, is that say the business has a year end date of 30 June 2022, then not only will those profits be declared to HMRC on the 2022/23 tax return, but there will be a report required for the profits for the period from 1 July 2022 to 5 April 2023. This means that 21 months of profits are reported to HMRC, rather than the usual 12. Whilst there may be some relief, depending upon the profits reported in the opening years of the business, this relief may be insignificant for a business with significant growth.

The government are considering allowing those additional profits, earned in 2022/23 (in the above example from 1 July 2022 to 5 April 2023), to be spread over a period of five years, if required, to reduce the tax impact. However, this sounds like more complexity, which is what they are trying to avoid!

 

Opportunities and concerns

Of course there may be tax planning opportunities to take advantage of, in the interim period, especially if the current business profits are low but expected to rise and these should be considered sooner rather than later.

There is also the cashflow impact of paying any accelerated tax, on profits taxed earlier than expected, to consider.

Longer term, the downside is that there may be less opportunity for tax planning. For instance, a sole trader with a 30 June year end, has nine months to, say, make a pension contribution to save some higher rate tax. So this gives plenty of time for the year-end figures to be finalised, so the tax advisers can plan. Whilst MTD should help make in year planning easier, there are always adjustments and provisions to figures, post year end which may mean that you end up undertaking tax planning on figures that ultimately are altered.

In addition, we anticipate that there will be a lot more pressure on accountants and tax advisers, who will be expected to cope with volumes of work, with similar year ends, particularly as many companies have a year end of 31 March. One view would be perhaps to move everyone to a calendar quarter accounting year end, which therefore still complies with the MTD accounting periods for reporting income/expenses but allows much more flexibility.

We should state that we are not aware of any plans to force limited companies to change their reporting period, thus far.

We will keep you abreast of any further developments. In the meantime, if you have any queries, please give us a call or contact us here.


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