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Basis period to be abolished in 2022 for the self employed

HMRC is set to abolish the basis period in 2022 for the self-employed which could impact the income payments of sole traders, freelancers and the self-employed. These changes are intended to bring the filing dates for the Making Tax Digital for income tax (MTD) plan. In essence, this means that many taxpayers will have to pay more in their 2022/23 tax bill.

What is the current framework?

At the moment, businesses finalise their accounts on a specific date each year, which is referred to as the accounting date. It is normally the case that companies can set their own accounting date, which does not have to coincide with the actual tax year-end date.

Self-employed individuals have to pay income tax on the accounting period that runs up until the end of the tax year. So, for a business with accounts that end on April 1st 2021, they will need to pay all of the tax for 2021/22 for those specific accounts. This is known as the current year basis.

It was initially the case that businesses could use special rules to stagger how taxes were taken, essentially cover profits over specific periods of time. Doing this creates a situation where the same profits might actually be run through HMRC more than once. If there were any overlap profits, businesses could claim relief if they ceased trading or if they change accounting dates.

What is going to change?

The new proposals by HMRC look to change how the current year basis is assessed, switching it to a tax year basis instead of from 2023/24. If this goes through, it will take effect from the 2022/23 tax year. These changes will affect all unincorporated businesses with accounting dates that don’t end between March 31st and April 5th.

How will this all work?

To give you a good idea of how this will work, consider this example. A sole trader business has an accounting year that ends on April 30th and has used this date for a number of years. In the 2021/22 tax year, the company again ends their accounting year on April 30th 2021.

Next year will be the transitional year for this company, so they will need to move their tax year basis. Profits for 30th April 2022 will need to go into the tax return, as well as profits from May 1st 2022 until 5th April 2023.

In short, they will need to declare a total of 23 months worth of profits, with income tax payable on all of it by January 31st 2024.

This may come as a shock to many self-employed individuals, so HRMC has announced that there will be transitional relief available. This will allow all profits from 2022/23 to be spread out over 5 years. This could make tax bills much more manageable.

How can businesses prepare?

The easiest and most effective change a business can make is to alter its accounting date so that it falls in line with the tax year. Failing to do so could create a number of problems when filing to deadlines.

So, if your business draws up their accounts to December 31st, then you will need two sets of accounts to file tax returns by January 31st every year. This is an incredibly short window - just one month - to prepare accounts accurately or be forced to used estimates.

If you are self-employed, acting sooner rather than later can help make this transition easier. Take the time to check if there is any overlap relief available for you and be prepared for a rise in your tax bill by 2022/23.

What can businesses do?

In reality, many businesses will likely choose to change their accounting date to suit the tax year. Those who don’t fit with the tax year, may find that filing deadlines could be problematic.

For example, a business that makes up accounts to 31 December will need to supply two sets of accounts to file their tax return by 31 January each year. Leaving businesses with just one month to prepare accounts or they will be forced to use estimated figures.

If you require accountant assistance with understanding or navigating the various changes in tax regulations and understanding the basis period abolished, speak with us at SRB Associates in Melton Mowbray today.