One could say that the Chancellor chose to hand out tricks rather than treats this Halloween in the form of a £1.7bn tax grab hidden in his Autumn budget
Could you afford to pay a tax bill over not just one tax year but two? If not, you may have to reconsider when to file your tax returns based on new tax reforms on the self-employed.
Reforms to tax calculations for the self-employed that will come into action in the 2023 to 2024 tax year will result in a “significant acceleration of tax payments”, the Chartered Institute of Taxation (CIOT) has reported. The £1.7 billion raised by the measure over the next five years makes it the biggest tax-raising measure confirmed in the Autumn budget.
A policy paper has confirmed the government’s plans to reform the ‘basis period’ rules which determine how trading income for unincorporated businesses (that is, self-employed sole traders and partnerships) is allocated to tax years. The proposal is to change the allocation so that it will be based on the profits or losses arising in the actual tax year, rather than (as now) in accordance with the accounting period ending in the tax year.
This measure is expected to have no impact on individuals other than the self-employed and partners with trading income (which have been detailed in the impact on business section). There is expected to be no impact on family formation, stability or breakdown.HMRC
Exchequer impact (£m)
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Which companies will be affected by the basis rules reform?
This measure will only affect businesses that draw up annual accounts to a date different to 31 March or 5 April (mainly seasonal businesses and large partnerships), and businesses that commence from 6 April 2024. For other businesses, this is likely to bring forward the date on which taxable income will need to be calculated and tax will need to be paid.
“It will also require estimates to be made of the profits generated in the latter part of a tax year (unless a business reverts to an accounting year that corresponds with the tax year) as the profits for a tax year will continue to be determined with reference to the business’ accounting periods,” said the ICAEW.
This new method of calculating taxable profit will apply from the tax year 2024/25, rather than 2023/24 as previously planned.
How will the basis period affect self-employed finances?
“This change will mean that affected businesses will pay tax on profits for more than a 12-month period in the tax year 2023 to 2024 as they transition into the new ‘tax year basis’,” said Pete Miller, Chair of the CIOT’s Owner Managed Business Committee.
Miller said that while it will be possible to spread any excess profits over five tax years, the Exchequer Impact of the change is significant.
Here he explained:
Between 2024-25 and 2026-27 it is expected to raise an extra £1.715bn. There will be further impacts over the following two years so the overall impact could be over £2bn. This is a significant acceleration in the amount of tax revenues flowing into the Exchequer.
Businesses that don’t already have an accounting period end of either 31 March or 5 April will need to weigh up the costs and benefits of keeping their existing accounting date compared to moving it to 5 April or 31 March to avoid additional complexity, such as time-apportioning their profits into the appropriate tax years and needing to use estimates if their accounts have not been finalised by the time they need to submit their self-assessment tax return to HMRC.
“The impact assessment published recognises that there will be one-off costs for businesses including familiarisation with the rules, updating software, and deciding whether to change their accounting date to 31 March or 5 April. However, the estimated cost of this is considered to be negligible, which we think is unrealistic,” said Miller.
What about overlap relief?
If the business has any overlap relief it will be able to use this against the additional profits arising in the transitional tax year to mitigate the enhanced tax charge arising in that year. ICAEW understands that there will be more flexibility to use this overlap relief than was set out in the draft legislation published in July.
“Where additional taxable profits remain even after deduction of overlap relief, business owners will have the option to spread that additional profit over five years,” said the ICAEW. “Some respondents to the consultation on this measure, including ICAEW’s Tax Faculty, expressed concern that this additional profit could have a knock-on effect for other tax purposes in those years, such as the impact on personal allowances, high-income child benefit tax charge and allowances for the purposes of contributions to registered pension schemes.”