The government has announced that unincorporated businesses will change from the current year basis to the tax year basis with the transitional year being as soon as 2022-23.
Traders with a 31 March or 05 April year end will see little difference. The majority of traders have a year-end which aligns with the tax year but there are some which do not. Those taxpayers could see their tax liabilities accelerated and possibly also increased by pushing income into the higher rates of tax.
Some taxpayers may see their tax liabilities reduce but, for those whose taxable income increases, the additional taxable income could also affect things like Child Benefit Claims, Tax Credits and Marriage Allowance claims. Planning in advance will be the key to managing this change and minimising its financial impact.
The government is still consulting on how this will work in practice, but it appears that this will go ahead, as consultation seems to be centred around how it will be implemented, rather than if it will.
Please read on as there are things which we can help you with which could minimise the financial impact of the change.
2022/23
If a sole trader or partner has a year-end which is not the tax year itself, it will report profits for the existing accounting year in addition to the period from the year end up to 31 March or 05 April 2023. From this, traders can deduct something called Overlap Relief’. Because of how the basis periods currently work, taxpayers may have been taxed on the same income twice (creating ‘overlap’) which can be deducted in full when moving to preparing accounts for the tax year itself.
Where the taxable profits are more than they would have been using the existing rules, taxpayers can elect to spread the excess over 5 years.
This is best demonstrated by an example.
Pete is a sole trader. His profits are:
£55,000 for the year ended 30 April 2022; and
£66,000 for the year ended 30 April 2023.
He has overlap profits brought forward of £20,000.
Under the current rules, Pete’s profits for 2022-23 are those for the accounting period ending 30 April 2022: £55,000.
Under the rules as proposed, Pete’s taxable profits for 2022-23 are calculated as set out below.
In this example, Pete’s profits in 2022-23 are more than they would have been if calculated under the current rules so he has the option of electing to spread the excess amount over a maximum of five years. Assuming that he makes the election and chooses to spread the excess over the 5 year maximum, his taxable profits in 2022-23 are calculated as:
2023-24
For 2023-24 onwards, the taxpayer is taxed on their profits for the tax year itself plus any transition amounts which have been spread from 2022/23.
How we can help
If you are running an unincorporated business and your year end is not 31 March or 05 April, there are things that can be done to help mitigate the effects of the change. If you are going to be affected, this is something you need to start planning for now. Timing capital expenditure wisely, making pension contributions or changing your year-end sooner than the deadline are examples of possible ways of reducing its effects.
Please speak to us for advice which we will tailor to your individual circumstances.