All unincorporated businesses, including sole traders, the self-employed and trading partnerships, could face a much higher tax bill in years to come, according to Haslers Chartered Accountants.
The Loughton-based firm is concerned that changes to the tax basis period, from April 2024, could mean some businesses are hit by a larger one-off tax bill.
Currently, unincorporated businesses are taxed on profits arising in the accounting period ending in a given tax year.
An accounting period ending on 31 December 2021, for example, would be taxed on profits arising in the 2021 calendar year rather than the 2021-22 tax year.
A business’s profit or loss for a tax year is, therefore, usually the profit or loss for the year up to the accounting date in the tax year. This is called the ‘basis period’.
However, the proposed reforms would mean that interim arrangements will apply to businesses that do not currently have year-ends falling between 31 March and 5 April each year.
These businesses will potentially face a single greater tax bill from their profits arising in the year-end falling in the 2023-24 tax year to 5 April 2024.
Jon O’Shea, a Tax Partner at Haslers, said: “This change could be costly and complex. Those affected will need to need to apportion their profits and losses over a longer period than they are used to, which will result in some businesses recording a lot higher profits as their accounting period will be longer.
“It will also mean that they may have to use provisional figures in their tax returns, if the accounts and tax computations for later accounting periods in the tax year are not prepared before the tax return filing deadline, later amending their returns once figures are finalised.”
He added that because reliefs, allowances and tax band thresholds will be unchanged and not be pro-rated, some taxpayers may move into higher tax bands, while also restricting their ability to benefit from various annual tax-saving opportunities.
Haslers said some support is available to help those affected by these changes. HMRC is considering an election allowing unincorporated businesses with higher profits to spread those additional profits equally over five years.
HMRC will also offer regular Time to Pay arrangements for those that need to spread the costs further.
O’Shea added: “Businesses will also be able to use all of the overlap relief they accrued when they began trading during the transition year (2023-24).
“This potentially allows business to only pay tax on 12 months’ profits. However, as overlap relief dates back to the first year of trading it is often based on much smaller profits, which may restrict the support available.”
At the moment the change in tax basis periods is currently under review and its implementation has already been delayed once by one year.