It is probably a bit early for anyone other than accountants to start worrying about MTD – Making Tax Digital, which will impact income tax procedures with effect from April 2023. You may be thinking that this is a long way off yet.
However, another major change looks set to be slipped in ahead of the introduction of MTD. HMRC are planning to move every sole trade and partnership on to an actual tax year basis. If your year end is 31 March (or 5 April) you will not be affected. If you have a different accounting period, the profits, or losses of two accounting periods will have to be apportioned to give the profit for the year ended 31 March.
The proposal is that the tax year basis will apply from 2023/24, with 2022/23 being a transition year. There is also some talk about changing the tax year but it is not clear how this change would impact the ne actual basis of taxation.
HMRC has opened up a six-week consultation period to solicit views on proposals to simplify basis period rules for taxing income from self-employment. The tax department wants to make it easier for businesspeople to work out what tax they should pay when their accounting periods cut across the 5 April tax year end.
The unseemly haste and abandonment of the usual consultation process appears to be driven by the wish to implement any changes before Making Tax Digital for income tax self assessment (MTD ITSA) becomes mandatory from April 2023.
According to a minister, the rules are “straightforward” for the 93% of sole traders and 67% of business partnerships that draw up their annual accounts to align with the 5 April tax year end (or 31 March”).
The proposal, which is the culmination of a five-year conversation that started at the Office of Tax Simplification, would make the 5 April/31 March tax year end the default basis period for all trading income, aligning it with all other forms of income.
The idea is fuelled by the march towards Making Tax Digital, which revolves around end-of-quarter reporting. So as a prelude to the introduction of MTD for income tax from April 2023 (MTD ITSA), the reporting of accounting data is to be aligned exactly with the tax year.
The transition year will be 2022/23, so you can expect a larger tax bill in that year as more than 12 months profits are reported to align the old and new systems.
The law will deem accounting periods ending on dates between 31 March to 4 April as ending on the tax year end: 5 April. Businesses which already draw up accounts to 31 March or 5 April will see no practical difference from 2022/23. P
Property letting businesses already have to report to the tax year, but in practice many draw up their accounts to 31 March anyway.
Under the tax-year basis the self-employed taxpayer will file MTD reports for all their sources of income by the same date each quarter, with a possible deviation for VAT if your return period is not aligned.
The estimated tax liabilities, that HMRC will feed back to you based on those quarterly MTD reports, will also make more sense to the taxpayer, as the income reported in the quarter will be what drives the tax due for the year.
Following these developments, you can expect shortening of the payment dates to be the next change.
The quarterly MTD updates will have to be submitted within one month after the end of that quarterly period. The first quarterly period for a business must start on the digital start date that applies to that business but with the move to an actual tax basis, it seems that all unincorporated businesses will now have a digital start date of 6 April 2023. This will mean that all businesses will be reporting under MTD for the same quarters with e pressure that will place on accountants and the HMRC computer systems.
For some businesses, the change to a tax-year basis would mean a significant additional tax bill in the transitional year on profits that are taxed to “catch up” on the proportion of the basis period not taxed in the previous tax year.
However, transitional provisions would provide for the spreading of transition-period profits over five tax years, starting with the 2022/23 tax year, with the option to accelerate. This would carry the risk of tax and national insurance rates increasing during this period.
HMRC is not asking businesses to change their accounting date. Unincorporated businesses will still be able to draw up accounts to any accounting date that suits them. However, an apportionment of profit or loss from different periods of account would be needed to fit to the tax year.
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