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Profits for the self-employed

How they are assessed is changing

Nicky Owen, Partner, Professional Practices
09/08/2021
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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 5 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.

Contact us

Nicky Owen
Nicky Owen
Partner, Professional Practices
London