Every week we take a look at what is trending in the accountancy and tax press and share items that we think will interest you. However, these are only outlines and where they relate to tax planning should not be acted upon without looking into them more completely as everyone’s circumstances are particular to them. You need to take specific advice appropriate to your own circumstances.
While every effort is made to deliver accurate, informative and balanced articles this content is general in nature and should not be used as the sole basis for making decisions.
Sole Traders and Partnerships
Basis Period Reform
If you do not trade through a company. then you are going to need to understand the new “Tax Year” basis periods for income tax purposes.
The concept is very simple. Instead of being taxed each year on the profits from the accounting period ending in the tax year, you will now have to potentially apportion profits from 2 accounting periods to determine the profits that are taxable in each tax year. If you have a 31 March or 5 April year-end, you can ignore the rest of this article because you will not be affected.
The sting is that 2023/24, the tax year just coming to an end, is the transitional year. HMRC were never going to let you have profits and pay no tax so you could end up being assessed on 23 months profits in one tax year.
Spreading provisions allow you to spread the additional profits over 5 years, but it’s still not going to be pleasant. It’s a good time to look at some tax planning.
According to HMRC’s statistics, 93% of sole traders and 67% of partnerships already have accounting periods aligned to the tax year, and they anticipate that many businesses will change their year ends to avoid the need to time-apportion profits.
These reforms are intended to simplify the taxation of trading profits and the implementation of Making Tax Digital for Income Tax (MTD). It also removes the tax deferral that was the reason so many of you have 30 April year ends.
The interaction with MTD also does not appear to have been considered fully. Under MTD, quarterly reports of receipts and expenses will need to be filed, with these figures supposedly driving the profit figure for the year.
The reports for the 2026/27 tax year will cover the transactions in the year to 31 March 2027 or 5 April 2027, but this will not match the profits for 2026/27 unless your accounting period is already aligned to the tax year or you change your year-end to align.
Transitional rules in 2023/24
These do not affect you if you have a 31 March or 5 April year-end, or something in between.
In 2023/24, your profits to be taxed will be made up of 2 components:
- The profits from the trading period that normally ends in the year ended 5 April 2024 e.g. 30 April 2023. 31 July 2023, 31 December 2023, 31 January 2024 etc.
- The profits arising between this date and 5 April 2024. Unless you change your year-end to 31 March or 5 April 2024, these profits will be apportioned out of your next accounts.
The first 12 months of the basis period (1 above) is the ‘standard part’.
If the standard part ends before 31 March 2024, the remainder of the basis period is the ‘transition part’. So, if you have a 30 April year-end, the accounts to 30 April 2023 are the standard part, while the transition part is 11/12ths of the profits to 30 April 2024. So, 23 months of profit is all taxable in 2023/24.
If you have any overlap profits for relief, this is deducted from the transition part. We can usually tell you if you have overlapping profits. They are generally built up in the years you started trading to reflect the profits used more than once to calculate the taxable profits to be declared on your first couple of tax returns
Transition profits can be spread equally over the five tax years from 2023/24 to 2027/28 or you can choose to pay the tax on those profits sooner. If you cease trading during this period, any untaxed transition profits will be taxed in the year you cease.
Transition profits are not included in your income when determining high-income child benefit charges, pension taper and entitlement to tax-free childcare. You will however still be caught by the loss of personal allowances if your total profits exceed £100,000 where the effective rate of tax is forecast to rise to 67%.
What can you do?
- Change your year-end to 31 March or 5 April 2024 – this will save some admin going forward but not tax.
- Incorporate, either before 5 April or just after. Here there can be some interesting tax savings but it depends upon your particular circumstances. However, there are pros and cons to incorporation so this needs to be considered very carefully.
- Nothing – in which case you may need to file a provisional tax return every year and then update it when the profits for the second trading period are known and can be apportioned.
Get in touch!
This change is going to affect any sole trader or partnership with an accounting period that is not aligned with 31 March or 5 April and most people don’t yet realise we are already in the transitional year and the tax year basis starts on 6 April 2024.
So, if you need help either to understand the issues or to look at some tax planning around the change, get in touch.
Undeclared Dividend Payments
If you get a dividend from your company, is it being properly declared on your tax return? HMRC suspects many go undeclared and are therefore starting a campaign targeting possible offenders.
Don’t be surprised to get a letter from HMR asking if you are compliant.
HMRC has been investigating company records and identifying companies that have made a profit but have depleted reserves, potentially due to a dividend payment.
The owners are being given the option to disclose information on any dividends that have not been declared or inform HMRC if they believe there is nothing more to declare.
You will be given 30 days to notify HMRC if there is nothing to declare.
Penalties charged can be as much as the same amount of tax due if wrong amounts have been submitted, plus interest charged per day for any late payments.
Currently, £1,000 can be earned in dividends tax-free, but from April 2024 this is being cut in half to £500. In April 2023, the dividend allowance was halved from £2,000.
Dividend income from assets held in ISAs will remain completely tax-free.
Labour and Corporation Tax
Shadow Chancellor Rachel Reeves has said that a Labour government would not increase the 25% corporation tax.
She has also said that a Labour government would put in a cap on the current 25% corporation tax rate and is also committed to full expensing, enabling businesses to claim back 100% of the cost of IT equipment and machinery against tax on their profits. The £1m annual investment allowance will also be maintained.
Reeves went on to say that Labour believes that a 25% rate strikes the correct balance between the needs of the public finances and the demands of a competitive global economy and that the next Labour government will make the pro-business choice and the pro-growth choice.
The next Budget is due on 6 March and the PM has to call a general election by the end of January 2025 at the latest.
Missed the Deadline
HMRC was expecting 12.2m 2022/23 returns and received 11.6m by the 31 January 2024 deadline, suggesting that 0.6m returns will be late.
However, the number received includes about 0.5m voluntary returns and late registrations, so the number missing the deadline is estimated at 1.1m.
HMRC will issue £100 late filing penalties to all those who missed the deadline. These are usually received by taxpayers between mid-February and mid-March.
Where a return is not required it should be formally cancelled, an appeal against the penalty is not the correct course of action.
Points to consider when making an appeal include:
- The return must have been filed before HMRC will consider an appeal.
- The appeal should normally be made within 30 days of the penalty notice, but late appeals will sometimes be considered.
- There should be a reasonable excuse for late filing.
- You can make the appeal online.
The reasonable excuse must continue throughout the period from the missed filing date until shortly before the return is filed.
Tax Relief on Camping Pods
In a recent case, the First-tier Tax Tribunal found that capital allowances could be claimed in respect of expenditure incurred by a company on the purchase of some (but not all) camping pods made available for school trips.
The pods fell into two categories based on the internal fit-out:
- pods intended for children (basic pods). Each pod had five beds and the experience was described as broadly comparable to a tent, with the advantages of better protection from the weather and enhanced security (a lockable door);
- pods intended for teachers (teacher pods). Each pod had two beds, flushing toilets and washroom facilities and a small kitchen area. They were properly plumbed in.
The company submitted its tax return on the basis that the expenditure on the pods was expenditure on plant and machinery qualifying for capital allowances.
The FTT concluded that the basic pods were not buildings. In addition to not being fixed to the ground, the basic pods provided only a crude place to sleep, not living accommodation, and in many respects were no different from a tent. The company was therefore not precluded from claiming capital allowances in respect of its expenditure on the basic pods.
The teacher pods were buildings and were excluded from capital allowances in respect of expenditure on plant and machinery. The pods were plumbed in and there was insufficient evidence that they were intended to be moveable.
If you have any questions about any of these, you know where to find us. If you prefer, just give me a ring on 07770 738770 or email me at email@example.com.