Profits for the self-employed
How they are assessed is changing
| The government have announced a delay to Making Tax Digital and the basis period reforms. |
The government has launched a consultation on its proposal that the assessable profits for self-employed individuals will be those arising in the tax year, rather than the current rule which is to tax the profits of the accounting year that ends in the tax year.
This will affect all individuals that do not have an accounting year end of 31 March (or 5 April).
The tax year 2022/23 will be a transitional year. If the profits assessable in the transitional year are higher than would be the case under the current rules, then it is proposed that there will be an election to spread the additional profits over a period of up to five years.
Example for those with 31 December year end
2021/22 - Current rule
- Taxed on assessable profits for the year to 31 December 2021
Tax return due and balancing payment due by 31 January 2023
2022/23 - Transitional rule
- Taxed on assessable profits for the year to 31 December 2022 Plus
- Taxed on 3/12 of the assessable profits the year to 31 December 2023 Less
- Overlap profits brought forward
Tax return due and balancing payment due by 31 January 2024
2023/24 New rule
- Taxed on 9/12 of the assessable profits for the year to 31 December 2023
- Taxed on 3/12 of the assessable profits for the year to 31 December 2024
Tax return due and balancing payment due by 31 January 2025
Issues
There is little time to work out the 3/12 prorated assessable profits so these will need to be estimated and a provisional tax return submitted to HMRC. Amended returns will need to be submitted once the figures are finalised.
Actions to take
At this stage you should work on the assumption that the proposals will be broadly adopted as outlined.
You will need to plan for the extra tax that will arise in 2022/23 (mainly tax payable on 31 January 2024) as a result of the change.
Discuss with us the impact of changing your accounting year end to 31 March.
The consultation period ends on 31 August 2021 and it is likely the final legislation will be enacted this winter.
